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.  

Kara Gammell
Finances expert
9
minute read
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Posted 15 OCTOBER 2021 Last Updated 26 MAY 2022

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.

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 any debts are paid from the estate.

The estate is the total of everything the person owned at the time of their death. It can include houses, vehicles, bank accounts, investments and any other property or possessions. But it also includes any debts, such as bank account overdrafts, credit cards, personal loans and home mortgages.

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, 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. Typically, a probate expert will be an accountant or solicitor, and they can help with the legal process.

Dealing with the estate and debts of someone who has died without making a will – known as dying intestate – is a little more complicated.

If you’ve taken on the task of dealing with the estate, 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 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.

If inheritance tax needs to be paid on the estate, it 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 company. 

 

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 and costs of administering the estate
  2. Secured debts – loans taken out against something the person owned. For example, a mortgage or a car loan
  3. Taxes that are due
  4. Unsecured debts – debts that don’t have an asset linked to them. For example, credit cards, overdrafts and utility bills.
  5. Beneficiaries – if there’s a will and no unpaid creditors have come forward.

You may also find that you’re asked to pay back any overpayments, such as pensions or benefits. If you need help, get in touch with a probate expert.

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, then there’s no money to pay off the debts and the debts will usually die with the deceased. The exception to this is joint debts.

Top tip

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.

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. Debts aren’t inherited so spouses, civil partners and other family members are usually off the hook 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 – a joint mortgage, for example. So the responsibility for paying off the debt will pass to the surviving person who took out the loan or signed the agreement.

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 owed and over what period
  • Get the deceased person’s name taken off the paperwork and the debt transferred to the survivor’s name
  • 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 enough to pay off the outstanding mortgage.

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 is responsible for any 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 died, please get some help. 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 out where to get free debt advice at MoneyHelper.

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 identify all creditors. If 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 at least a couple of months before you plan on sharing out the estate. There isn’t a legal obligation to do this, but if you do, you won’t be held liable for any unidentified debts. 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 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), then the executor should pay it out of this. This 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, the executor 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 item would become part of the estate.

Otherwise, you’ll need to consider your options, as hire purchase agreements can be complicated. The creditor or a debt advice service will be able to help.

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