When Aisha Roy, a 23-year-old budding artist based in Pune, lost her 68-year-old mother after her long battle with cancer in 2019, her world plunged into disarray. Her father had passed away when she was much younger.
While she was still figuring out how to deal with the emotional turmoil, insistent creditors came knocking on her door. Aisha’s mother had accumulated various outstanding loans, including a lingering mortgage from difficult financial times, personal loans, and borrowings from acquaintances to fund her medical treatment.
Luckily, her financial situation improved after her wedding, which took place the same year. Through a combination of increased income from her art classes and the financial stability that came with marriage, Aisha was able to successfully steer her way out of debt and toward a more secure financial future.
Instances where descendants find themselves entangled in the financial aftermath of their parents’ lives are regrettably not uncommon. We spoke to experts to find out the answers to some key questions.
Who Is Responsible?
The responsibility of legal heirs to settle their parents’ debts after their demise depends on several factors, including the nature of the debt, whether the legal heir consented to act as the co-borrower or co-guarantor, etc.
Says Apoorva Bhadang, partner, Vesta Legal, a law firm, based out of Mumbai and Pune: “Section 6(4) of the Hindu Succession Act as amended in 2005, specifies that no court can enforce the recovery of a debt from a son, grandson or great-grandson solely based on the pious obligation under Hindu Law to discharge the debt of his father, grandfather or great-grandfather. However, if the legal heirs have explicitly agreed to take responsibility for the debt, this provision would not apply and they would be liable to pay the debt.”
What Happens In Case Of Unsecured Debt?
In cases of unsecured debt, such as credit card dues and personal loans, generally legal heirs are not personally liable to settle it. These debts are to be paid from the deceased person’s estate, if any. If the deceased does not have enough assets to clear the debt, the creditors may have to write off such debts.
Says Keshav Singhania, head, of private client, Singhania and Co., a law firm, based out of Mumbai and Gurgaon: “In the case of unsecured loans (say credit card dues), a legal heir cannot be personally held liable to pay off the outstanding dues. The dues can be met out of the assets of the estate in the first instance. Statutory liabilities like income tax etc. have the first charge on the estate and shall take priority.”
What Happens In Case Of Secured Debt?
Secured debts, such as home loans or car loans are usually linked with a property or an asset, which is mortgaged in lieu of the sanctioned loan amount. In these cases, the principal onus of the liability lies on the surviving guarantor or the co-borrower of the asset that is pledged.
However, in the absence of either of them, the banks generally consult the legal heirs. If the legal heirs wish to retain these assets, they need to continue making the payments towards the loan. If not, the property or asset can be sold off to settle the debt. In this case, too, the legal heirs would not be personally liable for the debt amount that exceeds the value of the asset itself. In fact, legal heirs will receive any excess amount, after the loan amount is settled from the auction proceeds.
“It is advisable that the legal heirs undertake a detailed cost-benefit analysis of the value of the asset in question prior to taking a call on proceeding with payment,” says Singhania.
Some legal experts interpret the law differently. They say that legal heirs are morally and legally liable to repay.
According to them, in the case of inheritance of assets, the legal heirs inherit the assets and liabilities of the deceased too. First, the debts are settled through the deceased person’s estate and in case the estate does not have enough assets to claim, then the creditors might have claims on the inherited assets of the legal heirs.
Says Ashish Yadav, an associate at TAS Law, a law firm based out of New Delhi: “In case of a specific loan, the treatment of debts depends upon the types of loans provided. For example, home loans may have specific provisions regarding transferring the property to the legal heirs, while for unsecured debts like personal loans and credit card debts, the creditor can claim the outstanding amount from the legal heirs of the deceased. Money borrowed from family and friends has no legal liability if it is based on love or mutual trust. In case of personal income tax liability, all liabilities are waived off after the demise of a deceased person.”
Says Himangi Kapoor, senior associate, SKV Law Offices, a full-services law firm, based out of New Delhi: “In the case of a secured loan, a bank or a financial institution can recover a deceased person’s debt from their legal heirs in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Further, depending on the loan type and the documents executed, the lender can enforce their legal rights against the legal heir of the deceased person.”
While legal heirs are not automatically saddled with their parents’ debts, the complexities of inheritance and debt settlement demand careful consideration. Seeking legal counsel and understanding the nuances of personal laws can empower legal heirs to sail through financial difficulties.