What happens to debt when someone dies?

What are the implications if someone dies in debt? Can you inherit debts? Does it make a difference if the deceased had life insurance in place? We take a look.  

What are the implications if someone dies in debt? Can you inherit debts? Does it make a difference if the deceased had life insurance in place? We take a look.  

Mubina Pirmohamed
Head of Life Insurance
3
minute read
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Posted 15 OCTOBER 2021

5 key things to understand about debts after death 

You might think another person’s debts are their business, but that’s not the case if you have to deal with the debts and estate of a person who’s died. We look at everything you’ll need to consider, but remember that if you aren’t sure about anything, you should seek legal advice.  

1. Paying off a deceased person’s debt comes first 

When someone dies, it’s the role of the executors – the people appointed to carry out the instructions in a will – to make sure, as far as possible, that all debts are paid from the estate. Anything left over after debt, inheritance tax and other fees have been paid is passed on to the people or organisations named in the deceased’s will – the beneficiaries. 

If there are more debts than an estate is worth – the total value of money, possessions and property that the deceased owned – it’s known as an ‘insolvent estate’. If you’re responsible for an insolvent estate, it’s a good idea to get help from a probate expert who can help with the legal process. Typically, a probate expert will be an accountant or solicitor. 

If you’re trying to sort out the estate and debts of someone who has died without making a will – known as dying intestate – it can be a little more complicated. If you’re willing to sort it out, you’ll have to apply for a ‘grant of letters of administration’ – also known as grant of representation, grant of probate, or confirmation (in Scotland). This then allows you to sort out the estate, and companies will deal with you officially. The process then becomes very similar to if the person had died with a will. However, the law rules on who will inherit any money left in the estate. See who may be entitled to a share here.

If inheritance tax needs to be paid on the estate, it will also be treated like a debt and will be paid out of the assets. 

Top Tip

It can be a good idea to get multiple copies of a death certificate, as most financial companies will require a copy and you don’t want to be waiting for one to be returned before you deal with the next provider. 
The executor or administrator should make sure the deceased’s bank stops making Direct Debit, standing order or regular payments immediately, so it’s clear exactly what was owed at the time of death. This may also mean a partner or spouse of the deceased needs to quickly switch household bills into their name. This will be less of an issue for bills that are paid out of a joint account – as the account will become the sole responsibility of the surviving person. 

2. Prioritise any debts – starting with secured debt

If you’re an executor of an estate you should contact all the creditors you’re aware of and explain what has happened. Ask them to provide you with a statement of anything that’s owed.  

When settling estates, there’s a set order of priority for paying off debts: 

  1. funeral expenses, if not previously paid 
  2. taxes that are due 
  3. creditors, such as loans, mortgages and other outstanding debts
  4. beneficiaries, if there is a will and no unpaid creditors have come forward 

When thinking about paying creditors, you should start by finding out whether any outstanding debts are secured or unsecured. 

  • Secured debt – is a loan taken out against something a person owns, like a property. Examples of secured debt include a mortgage or a car loan. 
  • Unsecured debt – this type of debt doesn’t have a large asset linked to it. Examples of unsecured debt could include credit cards, overdrafts and utility bills. 

You should pay off any secured debts first, before unsecured debts. You may also find that you’re asked to pay back any overpayments for things like pensions or benefits. If you need help, a probate expert will be able to help you. 

If there isn’t enough money, or assets, in the estate to pay off all the debts, then they should be paid off in priority order until the money or assets run out. Any remaining debts are likely to be written off.  

See advice from Citizen’s Advice on what counts as priority debts

If no estate is left, there is no money to pay off the debts, and the debts will usually die with the deceased.  
The exception to this is joint debts. 

3. Find out if any debts are held in joint names 

You’ll need to find out if any debts are held individually or in joint names. Individual debt is where a person takes out a debt in his or her name only. Spouses, civil partners and other family members aren’t usually responsible for individual debts, but they could be responsible for debts held in joint names. Typically, this is the case if they’ve signed a loan guarantee on behalf of the deceased, or co-signed a joint loan alongside the deceased. So the responsibility for paying off the debt will then pass over to the surviving person who took out the loan or signed the agreement. 

  • A loan guarantee is when a person makes a signed promise that they’ll be personally liable for someone’s loan repayments, if they can no longer make them. A guarantor is often used by a bank to secure personal loans. 
  • A joint loan, or joint agreement, is a loan that’s made by two borrowers. You’ll be responsible for the debt if your partner isn’t able to pay. An example of a typical joint loan is a mortgage. 

If there are joint debts, there’s a few things the executor and the surviving person will need to do: 

  • Make sure you fully understand the terms of any loan so you know how much is owing, and over what period 
  • Get the deceased person’s name taken off the paperwork and transferred to the survivor’s name solely 
  • Work out if you can afford to make the payments in full every month. If not, you may need to renegotiate the terms of the loan – for example, paying back a lower amount that’s affordable over a longer period  

If there’s a mortgage on a jointly owned property, then the details of the mortgage arrangement come into play. If you’re:  

  • tenants in common – the deceased’s share can be taken into account when paying back debts and will pass on to whoever they’ve named in their will, or according to the intestacy rules as appropriate 
  • joint tenants – the surviving tenant will automatically get the deceased’s share and ownership of the property. 

If the remaining mortgage holder wants to stay in the property, they’ll have to continue to pay the outstanding mortgage in full – every month. This is why many people opt for life insurance that will pay out at least enough to be able to pay off the outstanding mortgage. See Step 4 for more detail. 

In the situation of tenants in common, where the share passes to someone else and not you as the survivor, you’ll have to negotiate what will happen to the property with the person who has inherited the deceased’s share. 

If there’s a joint bank account, the surviving person becomes the sole owner of the account and remains responsible for any debts such as an overdraft. Remember to get the deceased’s name taken off the account. If you find out that you’re liable for a deceased’s debt repayments, you can get help from a solicitor or probate expert.  

If you’re struggling to pay off joint debts during a difficult time after someone has passed, please get some help. There are lots of potential ways to manage your debts, so why not get the help from non-judgmental experts. They can help work out the best solution for you and your situation. You can get free independent advice on debt from a variety of places including on the phone and online – some are even available 24-hours a day. Find help now.

4. Try to track down any other hidden debts 

With so many people carrying out their financial business online, it can be harder to track down paperwork for debts, and tricky to identify all creditors. Say you’re acting as an executor and pay out the shares of the estate to the people who are due them, then someone comes forward with a debt you knew nothing about – you might find yourself personally liable for the debt. 

A way to minimise this risk is by putting a Deceased Estates Notice in the local newspaper and the Gazette a least a couple of months before you plan on sharing out what’s left of the estate, after debts have been paid. There isn’t a legal obligation to do this, but it provides you personally with an added layer of protection. If you’ve done this as the executor, you won’t be held liable for any unidentified debts after this time. If you haven’t put the notice in, you could have to pay up yourself. You, as the executor, can take the costs for the notices out of the assets of the estate. 

5. Check if the deceased had life insurance (or other cover) in place

People often take out life insurance to cover any debts in case they die unexpectedly. A pay-out is usually tax-free, with a lump sum or regular payments going to people who are named as beneficiaries in a policy. So, always check if the deceased had taken out any insurance to pay off any debt. It’s also worth looking into whether or not the deceased had any employee benefits, such as death in service, which pays out a lump sum if a person dies while employed by a company. 

Term life insurance – such as decreasing term cover – is one type of life cover that could be used to cover ongoing debts, such as a mortgage. If there’s life cover in place, then whoever inherits a deceased’s property could use insurance pay-outs to meet mortgage payments. 

Start a comparison for life insurance today and see how easy it can be to find protection for those you care about most. 

Frequently asked questions

Will my credit card debt die with me?

No, the idea that the debt is automatically wiped out is a myth. If there’s enough money left in the estate to pay it off (having already paid off higher priority debts) the executor should pay it out of this. This obviously will leave less money to be paid to any beneficiaries. 

Will my family be responsible for my debt after my death?

Debt isn’t inherited in the UK, which means that your family, spouse, civil partner, friends or anyone else won’t become responsible for your individual debts when you die.

The only exception to this will be if a member of your family has taken out a joint loan, mortgage or agreement with you, or provided a loan guarantee for you. 

Any debts will be taken out of your estate – the value of what you leave behind – so your beneficiaries may receive less than if you hadn’t died with debts. 

What happens to hire purchase agreements after you die?

Hire purchase is used to pay for something over time, like a car, but the item doesn’t belong to you until the final payment is made. If the buyer dies before that final payment is made, you should check to see if there’s an insurance policy in place that will pay off the agreement on death. If that’s the case, the car would become part of the estate. 

Otherwise, you’ll need to consider your options, as hire purchase agreements can be complicated. You’ll have to check the agreement to see what the options are, it may be that you can: 

  • keep the item, take over the agreement and carry on paying for it 
  • return it to the supplier 

If you need help with your options, then the creditor or a debt advice service will be able to help. 

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