To inherit or reject debt?
When a person dies, it usually falls upon family members ones to make crucial financial decisions on their behalf. These often include settling the deceased’s debts. But thanks to ignorance and misinformation, many people find themselves settling debts that have nothing to do with them.
“Normally, the creditors will learn of a person’s death through formal channels or by word of mouth,” says Dr Jack Mwimali, the dean of Jomo Kenyatta University of Agriculture and Technology’s School of Law.
Thereafter, they will come forward and make their claims.
However, the payment of these claims are made against the estate, not the heirs of the property, he says.
“When it comes to succession —whether there is a will or not— the debts owed to the state by the deceased are given priority and, therefore, settled before any others. Even if the property has been left to several heirs, the first priority is to settle the debts owed before sharing out what remains among the beneficiaries,” he says.
Debts come in various forms, including mortgage, medical bills, student loans and even burial expenses. The law stipulates the types of debts that must be given priority.
“In most cases, the priority debts are hospitalisation and medical bills, and money owed to the government such as the deceased’s tax arrears,” Dr Mwimali says.
DOCTRINE OF ELECTION
“Once the priority debts have been repaid, consideration is given to whether any of the remaining debts was owed to an agency or businesses, and these are settled next. After that it comes down to the normal debts, which are usually the owed to colleagues and friends.”
Dr Mwimali says it is important to note that while the debts are repaid using deductions from the deceased’s estate, there are certain instances, such as inheriting a mortgaged house, when the heir has to deal with the debt hands-on.
“A mortgage confers the title to the lender,” notes Dr Mwimali. “This basically means that the bank becomes the owner of the property and the person receiving the money gets equity.” As the current owner of the house or mortgaged property at the time of the death, if no payment plan is made by those inheriting it, the bank can simply sell the property and take the money it was owed, plus the interest accrued. The rest of the money can then be distributed among the beneficiaries in accordance with the deceased’s wishes.”
However, unknown to many people, you are under no obligation to accept a bequest. Dr Mwimali says this is documented in the Doctrine of Election, a common law principle practised in Kenya and other parts of the world. This principle states that you can choose whether or not to accept a bequest. If you accept the it, you accept it with all the disadvantages (debts, losses and so on) that come with it. But you can also reject it and lose everything that comes with it.
“This doctrine can come in handy in a situation where the estate of the deceased is not enough to cover the payment of their debts,” says Dr Mwimali. “The inheritors will not make a claim to the bequest as it will not be beneficial to them. In such a situation, the estate is divided equally among those owed.”
“Most people are not aware of this the law,” says Dr Mwimali. “That is where customary practices usually come in, most of which are disadvantageous to the family.” For example, some people religiously believe in the obligation to repay a parent’s debt(s). This means that the heir will pay all the debts that come with inheriting the property.
INSURANCE FOR DEBTS
Meanwhile, some people keep the property within the family for sentimental reasons, even if paying off the debts that come with it makes them incur a loss,” he says.
But there are ways to protect your loved ones from having to deal with creditors when you die.
“Insuring your property will protect it from creditors because they cannot make a claim against the property but have to approach the insurance company, which will settle the debt,” says Dr Mwimali. “You can also have a guarantor for your debts, with whom the creditors will deal concerning the settlement of their debts.”
“However, it is however important to note that once the insurance company or guarantor pays off the debt, they have the right to claim the property for themselves,” Dr Mwimali notes.
Many people assume that if a man or his wife dies, then the surviving spouse is responsible for settling the deceased’s debts, which is not true.
“The Marriage Act of Kenya states that marriage does not affect the right of either spouse to own or dispose of any property other than matrimonial property,” says Dr Mwimali.
“So your spouse’s debts are legally not your debts and vice vera, unless the property was acquired jointly. Simply being married to someone is not reason enough to make you liable for their debts.”