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What happens when a borrower dies before fully repaying a bank loan?

Credit and debt have always been a way of life. Maybe you want to push your business to another level, the government wants to build a school or sponsor an important infrastructure project or you just want to buy your dream house or car… the point is, there are a bunch of reasons to drive anyone to get a loan.

In usual circumstances, when the creditor decides to lend the debtor, they agree on the loan term and repayment schedule. During the loan repayment period, a lot can happen including the death of the borrower.

Customarily, when someone dies without a will, trust, or any other kind of estate planning, their debts become a liability on their estate (all assets left behind by the deceased).

Right after death, succession of the estate opens up in order to get new owner(s). The person or institution appointed to handle the estate of the deceased when partitioning the property among the beneficiaries is also responsible for paying any debt payable of the deceased.

In case the debt’s final payment is not yet due, when the estate is being wound up, the obligation of repaying the loan passes on to the people inheriting the estate. The law provides that heirs irrevocably acquire rights and obligations proportionally attached to the estate they acceded to. Through these succession proceedings, you will probably get paid. In other scenarios, the defaulting loan if it is a secured one, secured creditors commonly exercise their rights as stipulated in the loan agreement which most of the time is to auction the mortgaged property so as to recover the debt. This proceeding works well for the creditor but is harsh to the borrower’s successor(s).

The above arrangements are traditional legal ways to get loans paid but not always the best businesswise. If the borrower dies before complete repayment, instead of considering the above-discussed measures, we recommend time-tested mechanisms that afford the borrower’s successor(s) a sense of flexibility in repaying the loan without selling the mortgage or forced succession proceedings or putting the creditor’s interests at risk. They provide win-win solutions.

The first option is for the lender to ask the estate beneficiaries to set up a company or partnership to manage the property and pay the loan on behalf of them without partitioning. The estate is transferred from the deceased to the company.

This would make it a lot easier for the management of the property and makes it simpler for the creditor in logistics and managing the loan. To be able to do this, the creditor enters into an agreement with the newly established legal entity that recognizes the entity’s obligation towards the repayment of the loan.

However, since this involves the transfer of ownership (from the deceased to the company) it requires deregistration and reregistration of the mortgage for secured loans; to acknowledge the new owner of the property which involves both the office of the Registrar General and the office of Rwanda Land Management and Use Authority.

It is also worth noting that, this process comes with some risks including the possibility of losing top rank over mortgage lest there are other creditors (s) such as Rwanda Revenue Authority who might want to become a priority during reregistration 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 the estate management and repayment of the loan again without portioning.

This will guarantee the management of the property and payment of the loan by the beneficiaries without affecting the ownership status of the property.

To ensure this commitment, the creditor should first enquire from the members of the estate an authenticated proof verifying that they are the eligible heirs of the deceased estate which is issued by the deceased primary residence sector office.

Creditors also should receive uncontested signed and notarised minutes of the family meeting that appointed the representative and express (signed and notarized) consent of the representative accepting that responsibility.

Creditors should, in addition, enter into a binding written joint suretyship agreement with the members of the estate. The agreement should stress out who are the members of the estate and the representative obligations as well as their liability against the managed property in relation to the loan.

The agreement should ensure personal guarantees from the members of the estate which will strengthen their commitment to the smooth management of the property and repayment of the loan. This is increased security for the creditor since this agreement assigns to the members of the estate the deceased’s contractual obligations but also ensures personal guarantees without transferring the ownership of the estate.

The abovementioned agreement should also reflect what should be the timeline for winding up the estate to make sure members of the estate do not change their minds along the way before full repayment. The estate should be wound up when the loan to the creditor has been sufficiently repaid. This option provides enough legal comfort owing to the fact that 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 open eye on the management of the property to make sure the representative and the members are doing a good job.

Predominantly, it is worth mentioning that these arrangements are more commendable to lending institutions in relation to sole proprietorship business loans.

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