On June 5, 2022, Finance Minister Nirmala Sitharaman stepped in to intervene in the case of Vanisha Pathak, a 17-year-old from Bhopal who has been sent legal letters over a home loan her now-deceased father took.

Sitharaman took to Twitter, tagging the Department of Financial Affairs and LIC India, and requesting that they investigate the situation.

Her father, a LIC agent named Jeetendra Pathak, had taken a loan from his office. After her father died, Vanisha began receiving legal notices in her father's name, demanding that she repaid his debt.

Anisha's funds and monthly commissions have been frozen by LIC since she is a minor. Vanisha told TOI that she has written to the authorities multiple times asking for more time to repay the debt because she is only 17.

While this is a case of a minor, here's what happens to a borrower's debt after he or she dies, as well as the legal heirs' penalties if the borrower dies with a loan outstanding.

WHEN THE LOAN HAS A CO-APPLICANT

If a loan is taken out jointly by two or more borrowers, the liability to repay the loan is passed on to the co-borrowers. The consequences of a single borrower loan will be determined by the nature of the loan, whether it is a secured or unsecured loan.

In the case that a borrower takes out a loan with another co-applicant, the primary applicant's obligation to repay the loan is transferred to the surviving co-applicant or joint debtor.

LOAN IN CASE OF UNSECURED LOAN

A lender cannot compel legal heirs to pay off an unsecured credit, such as a personal loan or credit card debt.
As there is no collateral in place of the loan with unsecured debt, no property of the deceased can be seized to pay the bill. Furthermore, if a debtor dies before repaying an unsecured loan, the lender cannot recover unpaid debts from the deceased's surviving partner or legal heir.

LOAN IN CASE OF SECURED LOAN

When it comes to a secured loan, the lenders already have collateral, therefore the decision to pay off the lender's debts will be made by the legal heirs, who will decide whether or not they want to keep the asset.

When a borrower is single and dies with outstanding secured debt, the secured creditor may seek repayment from the borrower's legal heirs, but the successors cannot be forced to do so. It is up to the legal heirs to determine whether or not the debt obligation will be honoured.

In the event of nonpayment, the lender may be able to reclaim the debt by selling the mortgaged asset. The co-applicant/legal heir is responsible for repaying the loan; if they are unable to do so, the bank seizes the property and auctions it to recoup the funds.

WHEN INHERITED ASSETS FROM THE BORROWER

If the legal heir has inherited assets from the deceased borrower, the situation changes. The legal heir's duties, on the other hand, will be limited.

If the legal heirs inherit any assets from the deceased person, they are obligated to repay the obligation.

Legal heirs are solely accountable to the degree that they receive any assets from the borrower. 

LOAN WITH INSURANCE POLICY

A secured loan is usually preceded by insurance, which can assist in the repayment of the debt. Home loan borrowers usually purchase an insurance policy that can be utilized to pay down the loan's outstanding balance.

Banks and NBFCs offer Loan Protector Insurance when they issue a loan, and if the borrower takes it out, the insurance company pays the rest of the loan if the borrower dies.

If the borrower does not have Debt Insurance but does have Term Insurance or another type of life insurance, the family members can repay the loan with the proceeds from the insurance policy.

LOAN WITH NO INSURANCE

If there is no insurance, legal heirs will have to come up with the funds themselves if they want the mortgaged asset returned.

If a legal heir refuses to pay a secured debt, the secured creditor has full rights to collect the obligation by attaching the deceased's property or assets and auctioning them under the SARFAESI legislation or by decision of a civil court or DRT.

WHAT SHOULD LEGAL HEIRS DO?

It is better for legal heirs to conduct a net benefit analysis of the worth of the mortgaged or inherited asset before deciding how to proceed with payments.

Following a person's death, the legal heirs must assess the entire value of the properties and assets that they inherit from that person, as well as the obligations of that person. The legal heirs will be liable to creditors for the value of the assets they inherit, which may be paid to the deceased's creditors.

If you have decided to pay off your debts or negotiate with your lender, you should act promptly because any delay will result in a greater interest burden.

According to experts, it is advisable for the legal heirs to approach the bank with the goal of resolving any outstanding debts and minimizing conflicts.