What happens to debt when someone dies?

What are the implications if someone dies in debt? Can you inherit debts? Have you checked whether or not the deceased had life insurance in place? We take a look. 

Kamran Altaf From the Life team
3
minute read
posted

1. Paying off a deceased’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.

2. Prioritise any debts – starting with secured debt

If you’re an executor of an estate, start by finding out whether any outstanding debts are secured or unsecured.

  • Secured debt – is a loan taken out against something a person owns, such as 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 (such as a property) linked to it. Examples of unsecured debt could include credit cards, overdrafts and utility bills.

You should pay off any secured debts first, then unsecured debts. A probate expert will be able to help you.

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.

  • A loan guarantee is when a person make a signed promise that they’ll be personally liable 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 joint loan could be a mortgage. 

If you find out that you are liable for a deceased’s debt repayments, you can get help from a solicitor or probate expert. Or you could call the National Debtline, who offer free and independent advice on dealing with debt (0808 808 4000, Mon - Fri, 9am - 8pm).

4. 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.

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