Loan zone: Loan liability after borrower’s demise – The Tribune-OxBig News Network

Q.What happens to a housing loan if the loan borrower dies before repaying the loan fully? sunita jolly, kurukshetra

In case of the death of a borrower before full repayment of housing loan, the onus of repayment falls on the co-applicant or legal heirs, unless there is an insurance policy that covers the loan.

The lender, most likely, will draft a new contract with possibly revised repayment terms. It can be a challenging and confusing situation to navigate, especially for the loved ones left behind. One should always read the fine print of the new agreement before signing it.

If the deceased had a co-borrower, the responsibility to repay the loan typically transfers to them. Co-borrowers share equal liability for the loan, and lenders will expect them to continue making payments without interruption.

If the property is jointly owned, the surviving co-borrower will not only have to manage the repayment but would also retain the property.

If the family of the deceased borrower is not capable of repaying the loan, then the lending financial institution is bound to seize the collateral property and in case the outstanding loan amount is higher than the sale proceeds, the legal heirs may have to pay the difference. In some cases, the lender may offer a moratorium period during which the co-applicant or legal heirs can decide on the suitable course of action.

However, keep in mind that lending institutions do not have the legal right to force the deceased’s family member or members to repay the dues. If the legal heir is financially incompetent to bear the debt burden and declines repayment, the lending institution will initiate the recovery process as per the guidelines outlined in the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. and any proceeds left after adjusting the outstanding dues must be transferred to the legal heir.

In the absence of a co-borrower, the legal heirs of the deceased borrower inherit the responsibility of repaying the loan. This can include children, spouses or other relatives as specified by law or a Will.

Housing loan insurance can be a major help in the event of the borrower’s death. Insurance helps in paying off or reducing the remaining balance on the loan. The policy , however, becomes active only in the event of natural death. Note that if the cause of death is a suicide, the loan insurance is void.

Will: If the deceased borrower had prepared a Will, the property and liabilities are handled according to the instructions specified in the Will. The executor named in the Will is responsible for managing the deceased’s estate, including settling debts and distributing assets as per the will’s directives.

Section 171 of the Contract Act, 1872: This Section establishes that a wife is not liable for the debts of her husband unless she has expressly agreed to be so. The Apex court has upheld this principle, emphasising that spouses have independent rights and obligations.

Ways to manage pending loans

Loan restructuring: Debt restructuring is the process by which the lender agrees to modify the original loan terms. Can request alterations in repayment terms and interest rates.

Loan rescheduling: Loan rescheduling refers to extending or adding more time to existing loan tenure.

Settlement: A home loan settlement is an agreement between the borrower and the lender in which the latter agrees to close the loan in exchange for a one-time lump sum payment that is significantly less than the actual outstanding dues.

Balance transfer: A balance transfer is a process of transferring outstanding debt to a new home loan lender on favourable terms.