How to Handle the Debts of a Deceased Estate in Australia

Have a question about this? Ask the Guide → the chat widget at the bottom-right of this page can answer it. Reading time: 8 minutes | The Executor’s Guide — Plain English. Step by step. Written for the person who just found out.

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One of the most misunderstood parts of being an executor is dealing with debt. Many executors do not know what debts the estate must pay, in what order they must be paid, or — critically — what they become personally liable for if they get it wrong.

The Basic Rule: Debts Are Paid Before Beneficiaries Receive Anything

The estate’s debts must be paid in full before any money or assets are distributed to beneficiaries. This is not optional. If you distribute assets while estate debts are outstanding, you can be held personally liable to creditors for the amount distributed. This is one of the most common mistakes executors make.

Step 1 — Identify All Debts

Before you can pay anything, you need to know what the estate owes. Debts typically include:

• Mortgage on any real property
• Personal loans and car loans
• Credit cards — all balances become estate debts
• Utility bills — gas, electricity, water, phone, internet
• Council rates and land tax outstanding at death
• Rent if the deceased was a tenant
• Medical and hospital bills
• Funeral expenses — these are a priority debt
• Tax liabilities — including outstanding income tax and any capital gains
• Business debts if the deceased was a sole trader

To identify debts: review the last 6–12 months of bank and credit card statements, check mail for bills and loan notices, contact the ATO for outstanding tax debt, and review the deceased’s phone or computer for recurring payments.

Step 2 — Advertise for Creditors

In most Australian states, executors are advised to advertise for creditors before distributing the estate — placing a notice advising creditors to submit claims within a specified period (usually 30 days). If you advertise correctly and a creditor does not come forward within that period, your personal liability to that creditor is significantly reduced after distribution. If you skip this step and a creditor appears after distribution, you may be personally liable. For any estate of meaningful size, advertising is strongly recommended.

Step 3 — The Order of Payment

When estate funds are insufficient to pay all debts (an insolvent estate), Australian law requires debts to be paid in this priority order:

1. Funeral and testamentary expenses — Reasonable funeral costs first. Testamentary expenses include the cost of obtaining probate.
2. Administration expenses — Reasonable costs of administering the estate.
3. Secured debts — Mortgages and other debts secured against specific assets.
4. Priority unsecured debts — Tax debts owed to the ATO and some employee entitlements have statutory priority in some states.
5. Ordinary unsecured debts — Credit cards, personal loans, utility bills, medical expenses. If insufficient funds, these are paid proportionally.
6. Gifts and legacies — Beneficiaries receive what remains after all debts are paid.

Step 4 — Handling Specific Debts

Mortgage

Notify the lender immediately. The mortgage does not disappear on death — interest continues to accrue. Options: continue payments from estate funds while administering, sell the property and repay from proceeds, or have the beneficiary refinance if they are inheriting the property.

Credit cards

Cancel all credit cards immediately. Do not make further purchases. Pay balances from estate funds as part of the debt settlement process.

Tax debts

Contact the ATO on 13 28 65 to confirm any outstanding tax. These rank as ordinary unsecured creditors unless specific legislation gives them priority.

Joint debts

If the deceased held debt jointly with a living person, the surviving co-debtor generally becomes solely responsible for that debt. Seek legal advice for significant joint debts.

Insolvent Estates — When There Is Not Enough

If the estate cannot pay all debts in full, do not distribute anything to beneficiaries. Administer in strict priority order. Beneficiaries receive nothing until all creditors are paid. If you believe the estate is insolvent, seek legal advice before taking any steps.

What Executors Are Personally Liable For

You are personally liable if you distribute estate assets while known debts are outstanding, pay lower-priority debts before higher-priority ones in an insolvent estate, or fail to advertise for creditors where a creditor later appears.

You are not personally responsible for paying debts from your own money simply because you are the executor. The estate’s assets fund the estate’s debts. Your obligation is to administer correctly — not to cover shortfalls personally. The key protection: pay debts before distributing, follow the correct priority order, and keep clear records.

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The Executor’s Guide provides general information about estate administration in Australia. It is not legal advice. If the estate is insolvent or you are uncertain about debt obligations, speak with a solicitor before making any payments or distributions.

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• What to Do When Someone Dies in Australia
• What Is an Executor?
• Executor Duties in Australia: The Complete Legal Guide
• Do I Need Probate? A Plain-English Guide