Cancellation of loan obligations incurred jointly with a deceased spouse
Spouses’ joint liability for loan obligations vs. rejection of inheritance
First of all, it should be pointed out that in a situation where a joint credit obligation is incurred by the borrowers, the bank has the right at its own discretion to assert its claim against both of them, as well as individually against each spouse. Importantly, the rejection of the inheritance by a co-borrower will not terminate the obligation of the co-borrower to repay the remaining part of the loan obligation. This is because he or she will still be liable in full for the debt under the loan agreement. In view of this, the bank may seek repayment of the entire remaining portion of the loan from the living spouse.
When can a loan be cancelled after the death of the deceased testator?
It should be pointed out that the issue of loan cancellation is not directly regulated in any of the provisions of the Law – Banking Law or special laws, for example, the Law on Consumer Credit. This means, then, that the cancellation of the loan, and therefore de facto debt, depends solely on the discretion of the bank itself.
In the course of proceedings before the bank, you may need the help of a lawyer who will present your situation to the bank and draw up all the necessary documents on your behalf.
How do I obtain the cancellation of a loan obligation?
For the cancellation of a loan, it is necessary to submit an appropriate application to the bank. The person entitled to file such an application is the heirs of the deceased, who have accepted the deceased’s inheritance and responsibility for his debts. The application should indicate the applicant’s data, specify the loan agreement and the reasons why the bank should grant the application for debt cancellation. Also it will be necessary to describe the applicant’s current difficult situation regarding life, financial or health, due to which it is not possible to repay the loan taken out by the deceased.
What is the practice of banks in terms of cancelling loan obligations?
The practice of banks is not unified in this regard, and much depends on the approaches they have established in this type of case. However, each of the applications submitted will be considered individually. A number of factors play a role in the outcome of the case, of which the life situation of the heir is essential. Thus, cancellation of a debt is not an action that occurs automatically and in every case.
Significantly, since the cancellation of a loan depends solely on the will of the bank, it can take place both as to part and all of the debt. Therefore in the event of a partial cancellation of the loan, it will be necessary to settle the remaining part of the loan. In many cases, along with the cancellation of the loan, there is a relevant agreement between the bank and the heir, whereby the parties agree on the terms of repayment of the remaining debt to the bank.
Obligation to pay income tax when a loan liability is cancelled
It should also be mentioned that with the cancellation of part or all of the loan by the bank, there will arise an obligation on the part of the debtor to pay personal income tax. This is because the cancellation of a loan, even in part, will constitute income for the debtor within the meaning of the tax law. In order to calculate the amount of tax, it is necessary to take the equivalent of the debt forgiven by the bank – it is this amount that will constitute the value of income earned by the debtor under the tax law.
All information regarding the issues described above can be clarified by our lawyers specializing in Polish inheritance law.