Any debts you have are passed on to your estate when you die. How those debts are dealt with – and who ultimately pays for them- will depend on the kind of debt, whether it was insured and whether anyone else was a guarantor or co-signed the money you borrowed.
When you die, the value of all your belongings, cash and property is added together and becomes known as your estate. If you have written a will, the person you specified as executor will pay off your debts and then distribute the assets left in your estate, in a process known as probate. Under UK law, no one ‘inherits’ your debt.
If you haven’t written a will, a legal administrator will take on this role.
To be clear, the executor is not expected to pay for debts out of their pocket- your estate funds this. If you have lots of debts, these can eat into any inheritance or assets which would normally be passed on to your family and other beneficiaries.
Can My Debts Be Passed On to My Surviving Family?
Under UK law, no one ‘inherits’ your debt. Any debts you have when you die enter into your estate.
If you had life insurance, this might help to pay off some of your debts.
Otherwise, the executor of the will would need to organise your debts and use the money and assets in your estate to pay them off, one by one.
While it is possible for your debts to eat into your family’s inheritance, they will not inherit your debt as a negative balance.
If you held any joint debts, such as guarantor loans or mortgages, the people you shared those loans with could be asked to pay your share, but this will depend on the specifics of the contract you signed.
What if my estate isn’t enough to pay off my debts?
Under UK law, outstanding debts must be paid off before any inheritance is distributed.
The executor will use the money in your estate to pay your debts until they have all been settled, or until the money runs out.
If this happens, it’s usually the end of the line for creditors, and anything outstanding will be written off.
Exceptions to this are cases where a loan had a guarantor or was taken out with a second party, who may become liable for your outstanding debt.
Individuals hold most debts, and when that person dies, the debt dies with them. If the estate of the deceased is not enough to pay off the debt, it won’t be passed on to anyone else.
An example of an individually held debt is an overdraft. You could owe the bank thousands of pounds, but nobody else can be held liable for that debt when you die.
If you die with secured debts, the property or other assets (such as a vehicle) which you offered as security could be used by executor to clear their debt unless you had made special provisions in your will.
The exception to this rule is when you have taken out a loan with the help of a guarantor or co-signer. A guarantor or co-signer agrees to be responsible for your debt if you don’t pay it back, including in case of your death.
As with other debts, any guarantor-signed debts should be paid off using the estate of the deceased if possible, however, if there is not enough money in the estate the guarantor will be responsible for paying the outstanding debt or negotiating with the debt’s owner.
If two or more people took on debt together, then in most cases the surviving party will inherit the debt. Mortgages are slightly different; you can read about them below.
If the debt was insured or the person who died had life insurance, it is possible this could cover the deceased party’s share of the debt. If there is no insurance or particular clause written into the loan contract, then the surviving party will inherit the debt of the person who died.
The lender may be willing to change the terms of the debt repayment to help with the affordability of the loan in these circumstances.
What Happens if I Own a Home With Someone?
Things get a little more complicated with regards to mortgages, especially if the deceased is survived by a spouse, cohabiting partner or tenants with whom they share a mortgage.
The way debts are handled will depend on the type of contract they entered into when they took out the mortgage. A life insurance policy or mortgage insurance may cover the deceased’s debt.
Otherwise, the course of action is determined by whether the pair were ‘tenants in common’ or ‘joint tenants’.
Tenants in common, hold separate shares in a property. If any of the tenants die, their share in the property enters into their private estate, along with any debt that was secured against those shares.
This means that their share of the mortgage needs to be paid off by their estate. The person who inherits the share in the property may want to sell it to pay off the deceased person’s share in the mortgage.
To avoid the sale of the home, someone must agree to take on the deceased tenant’s share of the mortgage.
Joint tenants, on the other hand, own the property outright together. There are no defined shares assigned to either person. If one of them dies, the surviving partner becomes the outright owner of the property, but the debt remains with the estate of the deceased. If there is no insurance policy in place, this can make things quite complicated, especially if there is not enough money in the estate of the deceased to clear their mortgage debt.
The surviving partner may choose to take on the mortgage payment themselves, but is not obliged to do so as the debt does not legally belong to them.
Dealing With the Debts of Someone Who Has Died
If you find that you have nominated as the executor of someone’s will, you will be responsible for overseeing the payment of any outstanding debts and distribution of inheritance. This may feel overwhelming, and it could be a good idea to seek professional or legal help.
There are some simple steps you can take to start the process of dealing with the debts of someone who has died:
1 – Inform the Creditors
The first thing to do is to contact any person or organisation that the person who died owed money to. You should identify yourself as the executor of the will and ask for updated statements of their debts. You may also request that payments are frozen while you process the payment of the outstanding debt.
If the death of the person is likely to affect your own ability to pay debts- for example, due to a drop in income- then it might be a good idea to contact your creditors at this stage and see whether it is possible to negotiate alternative repayment plans.
If this feels too overwhelming, you could consider speaking to a debt counsellor, who would be able to negotiate on your behalf.
2 – Check for Insurance
Once you have contacted creditors, you should check to see whether the person who died held any form of life insurance. If they did, this could help clear outstanding debts.
Depending on the policy, payments could go towards beneficiaries of the will (such as family and loved ones), paying off a mortgage or could be paid directly into the estate, where it can be used to help clear debts.
3 – Prioritise the Debts
This is a relatively straightforward process. You will need to organise the debts by priority, in case the money in the estate is not enough to cover all of the debt the person left behind. Secured debts, such as a mortgage, should be a top priority.
Following this come ‘priority debts’. These are debts which can quickly escalate into legal proceedings if they are not paid on time, such as Income Tax and Council Tax debt.
Any other debts, such as credit cards, can be paid after this.
4 – Publish a ‘Deceased Estates Notice’
Once all known debts have been dealt with, you should issue a public notice (for example, in a newspaper) to allow time for any ‘undisclosed’ creditors to come forwards. If you don’t do this and later on another debt is discovered, you could become liable to pay it yourself.
If no undisclosed creditors come forwards within two weeks, you can start to distribute the estate to anyone listed in the will.
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