What happens when a borrower dies before paying off a bank loan in full? | New times
Credit and debt have always been a way of life. Maybe you want to take your business to the next level, the government wants to build a school or sponsor a major infrastructure project, or you just want to buy the house or car of your dreams … the point is, there is. lots of reasons to get someone to get a loan.
In usual circumstances, when the creditor decides to lend to the debtor, he agrees on the term of the loan and the repayment schedule. During the loan repayment period, many things can happen including the death of the borrower.
Usually, when a person dies without a will, trust, or any other type of estate planning, their debts become a liability on their estate (all assets left by the deceased).
Immediately after death, the estate opens in order to obtain new owner (s). The person or institution designated to manage the estate of the deceased when dividing property among beneficiaries is also responsible for the payment of any debt payable by the deceased.
In the event that the final payment of the debt is not yet due, upon liquidation of the estate, the obligation to repay the loan is transferred to the heirs of the estate. The law provides that the heirs irrevocably acquire the rights and obligations attached in proportion to the succession to which they have acceded. Through these inheritance procedures, you will likely get paid. In other scenarios, the defaulting loan if it is a secured loan, the secured creditors generally exercise their rights as stipulated in the loan contract which consists most of the time in auctioning the mortgaged property in order to collect the debt. This procedure works well for the creditor but is hard on the borrower’s successor (s).
The above arrangements are traditional legal means of getting loans repaid, but not always the best from a business point of view. If the borrower dies before full repayment, instead of considering the measures discussed above, we recommend proven mechanisms that provide the borrower’s successor (s) with flexibility to repay the loan without selling the mortgage. nor proceed to a forced succession or put the interests of the creditor are threatened. They offer win-win solutions.
The first option is for the lender to ask the successors of the estate to form a corporation or partnership to manage the property and pay the loan on their behalf without partitioning. The estate is transferred from the deceased to the company.
This would greatly facilitate the management of the asset and simplify the logistics and management of the loan for the creditor. To do this, the creditor enters into an agreement with the newly incorporated legal entity that recognizes the entity’s obligation to repay the loan.
However, since this is the transfer of ownership (from the deceased to the business), this requires the delisting and re-registration of the mortgage for secured loans; to recognize the new owner of the property which involves both the office of the registrar general and the office of the Rwandan Land Use and Management Authority.
It should also be noted that this process comes with some risks, including the possibility of losing the first rank against the mortgage, lest other creditors, such as the Rwanda Revenue Authority, wish to become a priority when re-registration of the mortgage.
The second option is for the members of the estate to elect among themselves (preferably the head of the family) who should be their representative in managing the estate and repaying the loan again without splitting.
This will ensure the management of the asset and the payment of the loan by the beneficiaries without affecting the ownership status of the asset.
To ensure this commitment, the creditor must first ask the members of the estate for authenticated proof attesting that they are the eligible heirs of the deceased estate which is issued by the sectoral office of the deceased main residence.
Creditors should also receive a signed and unchallenged notarized minutes of the family reunion that appointed the representative and the express consent (signed and notarized) of the representative accepting this responsibility.
In addition, creditors should enter into a legally binding written joint and several guarantee agreement with the members of the mass. The agreement should specify who are the members of the estate and representative obligations as well as their responsibility for the managed property in relation to the loan.
The agreement must guarantee personal guarantees from the members of the succession which will strengthen their commitment to the good management of the property and the repayment of the loan. This is increased security for the creditor since this agreement assigns to the members of the succession the contractual obligations of the deceased but also provides personal guarantees without transfer of ownership of the succession.
The aforementioned agreement should also reflect the timing of the liquidation of the estate to ensure that the members of the estate do not change their minds along the way before the full repayment is made. The estate must be liquidated when the loan to the creditor has been sufficiently repaid. This option offers sufficient legal comfort because it does not affect the mortgage registered in favor of the creditor as well as the ownership of the property. However, this arrangement would require the creditor to keep an eye on the management of the property to ensure that the representative and members are doing a good job.
Importantly, it should be mentioned that these arrangements are more laudable for lending institutions as compared to individual business loans.
The opinions expressed in this article are those of the author and do not constitute legal advice. Please seek professional advice with any special questions you may have.
The author is a business and commercial lawyer and trainee partner at K-Solutions & Partners
E-mail; [email protected]