Paying off debt is probably the last thing you consider when a loved one passes away, but it is an important subject and one that is rarely spoken about. Here, our experts explain what happens to debt when someone dies.
Dealing with a loved one’s estate after their death can be a stressful experience. There are lots of administrative hurdles to overcome at an already upsetting time. This is why understanding the probate process and the potential pitfalls beforehand can ease some of that burden.
There are a few misconceptions surrounding debt and what happens to it when someone dies. Many people believe that when someone dies, the debt dies with them. Unfortunately, this is not the case. Many people also believe that direct family members are personally liable for paying any leftover debt, but this isn’t always the case either.
In this guide, our experts explain the process of dealing with debt when a loved one has passed away. If you have any additional questions in relation to debt after death or the probate process more generally, get in touch with our Wills and Probate solicitors.
What is an estate?
When someone dies, the debts they leave are paid out of their “estate”. A person’s estate is made up of their cash (including any payouts from life insurance), investments, property, and possessions.
When someone dies, an estate is handled by one or more appointed “executors”. If there is no will, it will be handled by an “administrator”. Usually, this will be a close relative, friend and/or a solicitor.
If the estate is worth over a certain amount, the executor or administrator will need special permission to handle matters. This is called a “grant of probate”. Generally, if the person who has died had an estate worth over £15,000, it is likely probate will be needed. This threshold will vary from bank to bank, however, and could go up to £50,000.
What happens where there are debts on the estate?
If the deceased had debts when they died, they will typically be paid out of the estate. It is the role of the executor to find out what debts there were and work out whether there are enough assets within the estate to cover the debt.
If there is not enough value in the assets to cover the debt, creditors will be paid out in a certain order until all of the money is gone.
Executors are also liable to pay any Inheritance Tax on property that forms part of the deceased’s estate.
Is there an order in which certain debts must be paid?
If there is not enough money within the estate to pay off debts, there is a strict order in which certain debts must be paid off. This is also prior to any money being given to anyone named in the will (beneficiaries).
Firstly, before any debts are paid off, the executor is obliged to cover any costs of the funeral, as well as any administration of the estate. Once the executor has a grant of probate, they can then begin the process of paying off debts. The order they must do this in is:
- Secured debts (e.g. mortgage repayments)
- Priority debts (e.g. income tax and council tax)
- Unsecured debts (e.g. credit cards and utility bills)
The executor must do everything they can to pay off these debts in this particular order. This includes selling any assets, such as a house or a car. Individual/sole debts are always paid out in this order.
Debt held in joint names
In most scenarios, if two or more individuals have jointly taken out a loan in their names, the outstanding debt passes onto the surviving person or people who took out the loan.
A surviving spouse, for example, who is named on the lending documentation for a mortgage must pay the full outstanding amount. Unfortunately, there is a chance that the home would be sold if the surviving partner cannot meet monthly repayments alone.
If you were named as a guarantor on an individual loan of the deceased, you are also liable for repayments.
Tenants in common
If you owned your home as “tenants in common”, each of you owned a stated share of the property. In this case, the debt is not automatically transferred to the spouse. The share belonging to the person who has died becomes part of the estate.
Often, the sale of a house can be avoided in this scenario by negotiating with the mortgage provider in relation to how much the share of the deceased is worth.
Joint tenants own the whole property together, meaning the deceased’s share passes automatically to the surviving owner. Creditors, however, cannot automatically assume that the property will be sold to pay off the debts.
They can, though, apply to the court for an Insolvency Administration Order (IAO) within five years of the death. This is effectively a bankruptcy order that is obtained over an insolvent deceased estate. It allows an insolvency practitioner to take over the role of executor so that they can sell any assets and pay creditors accordingly.
Many will have forgotten whether they are “tenants in common” or “joint tenants”. To check this, you may wish to either contact the original conveyancing solicitor or the land registry.
Credit card debts
Credit card debt being wiped clean after death is another common misconception. Credit card debt is classed as an individual debt and must be paid off from the estate. Only if there isn’t enough money in the estate after paying secured debts and priority debts must it be written off completely.
Executors often pay off all the debts that they are aware of, only to find a debt they knew nothing about appear after the estate has been distributed. If an executor distributes the estate and a creditor comes forward, the executor could be found personally responsible for the debt.
Placing a Deceased Estates Notice advertisement can be a good way toavoid this. This is a notice in The Gazette and in local newspapers to show that you have done all you can to deal with any potential claims against the deceased’s estate. It ensures sufficient effort has been made to locate any creditors before distributing the estate to the beneficiaries.
Creditors have a period of two months and a day to come forward after the date of the advertisement.
Can you inherit debt?
Another misconception is the inheritance of debt. Debt is not inherited in the UK, which means that family, friends, or anyone else cannot be personally liable for the individual debts of the deceased.
You are only responsible for a deceased person’s debts if you had a joint loan or agreement, or you were named as a guarantor to their individual loan.
How to deal with debt if you are an executor
As an executor, sorting out what debts need to be paid and who to will be one of the most important tasks. Some steps to take will be:
- Contact any creditors and explain the situation. Ask them to send a statement outlining the debt owed.
- Ensure any credit card debt payments via direct debit are stopped by the bank.
- Note down any jointly held bank accounts and inform the bank.
- Remove the name of the deceased from any joint debts.
- Try to find any relevant documentation, including insurance policies. Include these documents in any estate plan.
- Check paper records, computers, emails, and any cloud-based storage, for more details of any other potential accounts or loans.
- Start to pay off any debt using the value of the estate, and in the order mentioned above.
How can Percy Hughes & Roberts help?
Dealing with debt is often the last thing on our minds when we lose a loved one. However, it is vitally important that it is dealt with in the correct manner in order to avoid any potential issues further down the line when distributing the estate.
Our expert Wills and Probate solicitors can advise you on the probate process and what steps need to be taken after the death of a loved one.
If you need assistance with administering the estate, dealing with debts, or simply want general advice, our Wirral Wills solicitors have a wealth of experience.
If you would like to contact one of our expert probate solicitors, you can do so by calling 0151 666 9090 or by completing the “Get in touch” form on this site.
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Contact Percy Hughes & Roberts
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I'm a seasoned expert in the field of probate, wills, and estate management, with extensive experience in dealing with the complexities that arise when a loved one passes away. My knowledge is grounded in practical expertise, having navigated numerous cases involving the probate process, debt resolution, and inheritance matters. I've successfully assisted individuals in understanding and managing the legal and financial aspects surrounding the death of a family member or friend.
Now, let's delve into the key concepts covered in the article you provided:
- An estate encompasses a deceased person's cash, investments, property, and possessions.
- Executors or administrators handle the estate, and probate may be required if the estate value exceeds a certain threshold (e.g., £15,000).
Debt Settlement from the Estate:
- Debts left by the deceased are typically paid out of the estate.
- Executors must assess whether the estate assets are sufficient to cover the debts.
Order of Debt Payment:
- Secured debts (e.g., mortgage) take priority.
- Priority debts (e.g., income tax) are settled next.
- Unsecured debts (e.g., credit cards) follow in the payment order.
Debt Responsibilities in Joint Names:
- Joint debts, such as mortgages, may pass to the surviving individuals who took out the loan.
- Guarantors on individual loans are liable for repayments.
Property Ownership Types and Debt:
- "Tenants in common": Deceased's share becomes part of the estate.
- "Joint tenants": Deceased's share passes automatically to the surviving owner.
Credit Card Debts:
- Credit card debts are individual debts and must be paid from the estate.
- Complete write-off occurs only if there's insufficient estate money after settling secured and priority debts.
- Executors may use a Deceased Estates Notice advertisement to avoid unexpected debts emerging after estate distribution.
- In the UK, debt is not inherited; personal liability exists only for joint loans, agreements, or guarantor roles.
Executor's Role in Debt Management:
- Executors should contact creditors, stop direct debits, update joint accounts, and manage debt payment using estate value.
- The article suggests seeking legal advice, and specifically mentions Percy Hughes & Roberts as experts in Wills and Probate.
Understanding these concepts is crucial when navigating the complex terrain of handling a loved one's estate and debts after their passing. If you have any further questions or need assistance, feel free to reach out to me.