One of the most common questions families ask after a loved one passes away is this:

“Do we have to pay off their debts?”

The short answer is no, not personally — but the full answer requires understanding how debts are treated within a deceased person’s estate.

This article explains, in plain language, how Malaysian law deals with debts after death, and what heirs are (and are not) responsible for.

Debts must be settled from the estate first

Under Malaysian law, when a person passes away, all their assets and liabilities form what is known as the estate.

The Probate and Administration Act 1959 (Act 97) governs how this estate is administered. An executor (if there is a will) or an administrator (if there is no will) is legally empowered to:

• collect and gather the deceased’s assets
• pay off outstanding debts and liabilities
• distribute the remaining balance to beneficiaries

This means debts must be paid before any inheritance is distributed. Beneficiaries do not receive assets first while creditors wait — the law prioritizes settling liabilities from the estate.

In practice, this explains why assets are often “frozen” until the estate administration process is completed.

How debts are settled before any distribution

Under Malaysian law, all debts of the deceased must be settled from the estate before any distribution can take place, regardless of whether the debts are secured or unsecured.

The executor or administrator has a legal duty to gather and, where necessary, liquidate estate assets to pay outstanding liabilities. This may include:

• using available cash balances
• selling investments or property
• allowing secured assets to be realised by creditors

Only after debts are dealt with can any remaining assets be distributed to beneficiaries.

What happens if the estate is insufficient to pay debt?

A common fear among families is that they may have to use their own money to cover the deceased’s debts.

Malaysian law does not require this.

“Beneficiaries are not responsible for a deceased person’s debts beyond the estate itself.”

If the estate does not have enough assets to cover all outstanding debts, it is treated as an insolvent estate.

Importantly, the shortfall does not become the personal responsibility of the deceased’s family members, unless they have their own separate legal obligation.

When family members can become responsible

Family members may remain legally responsible for a debt if they:

• are a joint borrower (e.g. joint housing loan)
• acted as a guarantor
• signed a personal guarantee

In these situations, liability arises from their own contractual obligation — not from inheritance law.

This distinction is critical and often misunderstood.

An important exception: EPF and Insurance Proceeds

EPF and insurance are like the ‘hidden gems’ in this context. The proceeds from EPF and insurance may not form part of the deceased’s estate and therefore do not need to be used to settle estate debts — but these exceptions are specific.

It only applies to non-Muslims, where proceeds from:

• EPF with a valid nomination,
• Life insurance policies with a trust nomination

are generally paid directly to the nominees and do not fall into the estate. As a result, these proceeds can bypass claims by the deceased’s creditors.

For life insurance specifically, this protection applies only when a trust nomination exists. A trust nomination is created when:

• a single person nominates his or her parents, or
• a married person nominates his or her spouse and/or children.

If these conditions are not met, insurance proceeds may still form part of the estate and be subject to debt settlement before distribution.

Conclusion

I hope this piece has brought some clarity.

In real life, families often struggle because important decisions were never made in advance. Perhaps the first question we can ask ourselves is this:

“Have you made things easier for your family, or left them with difficult decisions to figure out on their own?”

That question, more than anything else, is where estate planning begins.

Thanks for reading!