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Who Is Responsible To Clear The Loan Liabilities Of A Deceased Borrower

As a borrower, loan or debt is the biggest financial liability especially high-value loan. Human life is like a financial balance sheet of the company. We have assets on one side like Gold, Property, Investments etc. On the other side, we have liabilities like loan, debt, responsibilities etc. There are two types of liabilities i.e. one in the form of responsibilities like kid’s education, marriage etc. The 2nd type is more tangible i.e. financial liability e.g. debt or loan as a borrower.

The balance sheet is dynamic in nature. It keeps changing. If i avail a high-value loan then suddenly the liability section overtake the assets. In other words, i as an individual/borrower becomes debt-ridden company :). As a thumb rule, debt or loan for creating assets like property is good. Whereas any unsecured loan like personal loan or loan for depreciating assets is not good.

Needless to mention that life is uncertain. It may or may not give me a chance to close/clear my balance sheet before i die :). For example, if my age is 70 years then i am aware that i am in the later stages of a life. The life has given me enough time to manage my balance sheet of assets and liabilities. On the contrary, i am currently in late 30’s and if suddenly i die in an accident then what will happen? I am not worried about assets but more about liabilities. The entire situation becomes very complex. My legal heirs/beneficiaries will fanatically search for my WILL :). At the end of the day “The SHOW MUST GO ON” as the showman Raj Kapoor said once. They will be happy to see my assets but equally sad to see my loans, debts, and liabilities. Now, the Million dollar question arises Who will pay the Loan Liabilities of a Deceased Borrower i.e. Me?

Now you must be wondering Why i am getting worried about the fact Who will clear my Loan liabilities after me?. It is very important for me to address this issue as a borrower during my lifetime. Otherwise, trust me, my legal heirs or beneficiaries will curse me. To share a real life of example Ms. Tanuja from Indore (One of my client). Her husband bought a property in his name and she was included as a co-borrower on the insistence of a bank. Her husband died in an accident and being a co-borrower, the primary responsibility to clear home loan is of Ms. Tanuja. On the other hand, as per succession plan, her share in the property is only 1/3rd. Her mother in law who also has a 1/3rd share in the property refuse to bear the burden. Over time and again i keep highlighting that a husband should not include wife as co-borrower/co-applicant in the home loan. Especially if she is not a co-owner in a property or housewife/non-working. You may check my post, Joint Home Loan – 5 Most Common Myths for more details. Let’s check out how such cases are handled by the bank.

Primary Responsibility of a Loan Liability

Always remember that primary responsibility of a Loan Liability rests with the co-borrower or guarantor of the loan. The biggest catch is that the co-borrower or guarantor may not be the beneficiary. I shared the risks of being a guarantor in my post, Being a Loan Guarantor – Are You Risking Your Future? In one of the instance, Mr. Suresh was the guarantor of a home loan of his brother. His brother died due to some illness. Suresh was not a legal heir of his brother. Therefore, he was not a beneficiary but guarantor of the home loan. He contested the bank but bank forcefully recovered unpaid loan from him.

In the absence of co-borrower or guarantor, bank approaches legal heirs to clear the loan in the proportion of their share in the property/asset. In case, the loan is not cleared by legal heirs then the bank may take physical possession of the asset like House or Car & auction the same to recover their dues. We will discuss unsecured loans later in the post.

How to Secure a Loan – The Thumb Rule for a Borrower

There are many “permutations and combinations” & “ifs and buts”. Therefore, the basic thumb rule should be that the “Loan Liability of Borrower should rest on the Beneficiary/Legal Heir“. Here the most common anomaly is that loan liability is not in proportion to the share in the inheritance. As we checked in the case of Ms. Tanuja. Her share in the property is 1/3rd but loan burden is 55% of the property value. In this case, she decided to default on the home loan and let bank auction the property. If she would not have been the co-borrower in home loan then her debt liability was restricted to her share in the property i.e. 1/3rd instead of 100% outstanding. The dispute resulted in a huge financial loss to all the legal heirs/beneficiaries. As she was co-borrower, therefore, loan default impacted her CIBIL Score negatively. Let’s check out 2 possible solutions as per my understanding.

(a) Mention Loan or Debt details in the WILL:

It is always advisable to mention in the WILL that after the death of executor/borrower who will clear his/her liabilities. As i mentioned basic thumb rule is that onus to clear corresponding loan liability should rest with the beneficiary. Though it is very complex subject.

The unanswered question is who will clear the loan of a deceased borrower if the legal heir is co-borrower but beneficiary is someone else. For example, in one of the case, Person A’s wife was co-borrower of the home loan but the beneficiary of WILL was his father. Now the dispute arises who will clear the loan of a deceased borrower. Going by the home loan agreement, It is wife’s liability. The natural law of justice says that father should clear the loan. In my opinion, loan agreement supersedes the natural law of justice thus wife should clear the loan of a deceased borrower. In short, the property will be inherited by the father and loan will be cleared by the wife.

(b) Cover the Loan with Life Insurance Policy:

I will not discuss this in detail. In my previous posts, i discussed this point thoroughly. Only important point to make is that the beneficiary of Life insurance policy and the beneficiary/legal heir of the property should be the same. More importantly, benefit and liability should be in the same proportion. For example, if there are 3 legal heirs of property then all 3 should be nominee and beneficiary of life insurance policy in the same proportion.

What about Unsecured Loans?

Secured loans i.e. loans backed by collateral like property and vehicle are easy to recover. A major headache for banks is to recover unsecured loans of a deceased borrower like personal loan, credit card dues etc. In such cases, normally the bank approach legal heirs of the deceased.

One of the common misconceptions is that unsecured liabilities of a deceased also die with his death. The bank may take legal heirs to the court in the case of default and file civil suit. If the default is intentional then the bank can also file a criminal suit. It also depends on the quantum of outstanding. Normally, banks don’t pursue the case if the default is of the petty amount. In such cases, legal heirs also don’t mind paying the balance outstanding. If the unsecured loan is taken to create an asset like i converted my LED TV purchase into easy EMI. In this scenario, bank reserve right to attach the LED TV and will sell to recover the dues. Similarly, the borrower may avail personal loan to create an asset. if it is declared to the bank then the bank will attach the asset bought from a personal loan to recover the dues.

Words of Wisdom:

The biggest mistake by legal heirs/beneficiary of a deceased borrower is that they fail to inform bank regarding the death of a borrower. If the bank is informed on time then i observed that banks are accommodative in nature. They understand the situation and willing to offer EMI holiday to the legal heirs/beneficiary. The only pre-condition is that the intent should be to clear the liability of a deceased borrower. The bank may also entertain a request to transfer the loan in the name of a legal heir/beneficiary. For example, if the wife is the beneficiary of a property then the bank may transfer the loan of a husband in the name of a wife.

Last but not the least, in the case of dispute it is advisable to arrive at a mutually beneficial solution. A delay in resolution of a dispute or legal options might not be financially beneficial for the stakeholders.

Copyright © Nitin Bhatia. All Rights Reserved.

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Prashant
Prashant
8 years ago

Sir,
I am taking a Home loan and thought to include my wife ( house wife) name in registry, is it advisable by you?
also if i do the registry on her name and i will be paying the EMI’s, would i be getting tax benifits?
please suggest.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Prashant

You have not mentioned whether your wife is working or housewife.

ravi prakash
ravi prakash
8 years ago
Reply to  Nitin Bhatia

Dear Sir,

I would like to congratulate you for doing this great job and educating people on such important matters !!

Sir, I have similar query as asked by Mr. Prashant above, I’ve taken home loan including my wife as co borrower and she is a house wife. I will be paying the EMI’s and I wish to register the property in the name of both of us. Would I get Income tax benefits? Please provide your valuable suggestion.

Regards,
Ravi

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  ravi prakash

You can claim home loan tax benefits.

ADSTE ETW
ADSTE ETW
8 years ago

Sir,
I and my wife have taken a home loan jointly from SBI for a property jointly owned by us. In home loan agreement form it was mentioned that “the property shall be insured comprehensively against the market price”. As I infer from it that the property insurance is mandatory, but it is not mandatory to buy it from the SBI General Insurance. When I checked my loan account few days back I found that a premium of Rs 12696/- has been deducted against the SBI Long term home policy for 10 yrs duration. When I wrote an RTI to SBI, I asked them to provide the criteria adopted to choose SBI General insurance company as preferred insurer. SBI declined it stating that it was “commercial confidence” shown by bank in the insurer, which is totally against the fair lending policy. Also when I obtained the proposal form (filled by SBI RACPC) of Long term home policy from SBI General customer care, there were many misinformation like it was shown that property is solely owned by wife, her DOB, loan amount (that is really strange), it was mentioned that it is independent house and situated on 2nd floor, while it is on 7th floor, area of property etc. Also it (i.e. the proposer SBI RACPC) allowed SBI General to share our personal data, I have written a mail to SBI General for correction of information. Request you to answer following queries
1. Due to the wrong information provided by the proposer (SBI RACPC), is there is a chance of claim refusal in future. Do you think that it was intentionally done by proposer?
2. By deducting premium of home insurance policy from loan account, loan amount is increased and we will have to pay interest on it. Does SBI have the authority to deduct from loan account without asking from us? What measures can we take?
3. Can I cancel the home insurance policy and take one on my own?
4. Can I complain to RBI regarding this and how?
Please provide your expert opinion. Thanks in advance.

Vivek

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  ADSTE ETW

1. Yes. Claim can be rejected. It might not be intentional but data entry operators make mistake.
2. They must have taken your approval/sign/consent on proposal form. Please ask for copy of proposal form of home insurance signed by you. Sometimes the agents sign on their own.
3. If you have not signed the proposal form you can cancel, file a police case of forgery and cheating with SBI General Insurance & claim refund along with damages.
4. You can complain to IRDA not RBI

ADSTE ETW
ADSTE ETW
8 years ago
Reply to  Nitin Bhatia

Thank you sir for your prompt response.
2. I have not signed the proposal form. I have obtained the proposal form from SBI General insurance customer care on my mail id. It shows that the seal of SBI RACPC at the bottom column (Signature of proposer/ financier). By carefully observing the proposal form I could not see signature of any agent/person. Can the financier propose the insurance for the borrower?
Thanks again.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  ADSTE ETW

okay. Now you check your home loan application. There is an option to opt for home insurance policy whether you ticked the same or not. At the same time, whether you ticked the option or not, you can raise a dispute that you have not signed proposal form and is not aware of any such policy. You can also request for reversal/refund of premium and waive off interest charged on the same. then wait for SBI’s revert before next steps.

There is possibility that your consent is taken under home loan application and the the financier can sign the proposal on your behalf. You need to check actually what happened.

Iomi Syaz
Iomi Syaz
7 years ago

SIR,
If the principal borrower die before the repayment of loan,would bank proceed against the heir or guarantor to pay the loan to the bank?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Iomi Syaz

Yes. The loan will be recovered from guarantor or legal heirs.

Gowtham
Gowtham
7 years ago

Dear Sir,

Please Advice Me..

My Father Expired 10 months before, He signed for his co worker as a guarantor for a personal loan in Syndicate bank,

Now He is not repaying loan properly, Even though he is government servant bank doesn’t doing recovery from him, Bank official pressuring us for repayment.

Still Borrower getting state government salary.. No one is recovering from him

Still Now we did not get ant death benefits from Government . Already we in a bad situation. Banking officials threatening my mom & me if amount not paid they will deduct from my father death benefits & family pension.

Really in this circumstance me and my mom felt in bad situation. i am a jobless , my mom didnt receive any benefits from government. This situation make us to suicide.

Please Help me sir

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Gowtham

Firstly, i suggest you to keep negative thoughts away. You can request the bank to share the copy of documents signed by your father as a guarantor. You may go through the same. It will help you understand the liability of you & your mother in case of death of a guarantor.

prasad
prasad
7 years ago

Dear Sir,

loan is sanctioned to Borower for lamination machine, its not morguage loan an there are three co-borowers, after three month of loan he did not paid the installments. bank did not take any action against borower, after a year bank file the case in co – op bank. Bank never send the notice to the co-borower. in the mean while borower left the city without informing anybody and during the case one co-borower expired. result of court is x-party. after result of 3 year bank made the attachment on property of two co bower and ask for the payment. Right now case in the district co-oprative court. in the mean while bank owners relative make the aggrement to expired persons propery for making the commersial complex for business. they did not brought the nominee names of the expired person on the board.

please advice us what to do?

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