What happens to debt when you die?
If someone dies, their debts become liabilities for their estate. The executor, or administrator in the absence of a will, is responsible for settling any remaining debts using the assets of the estate.
Thinking about and dealing with the debts of a deceased person is never a nice thought. But it’s an important subject and because it’s rarely talked about, can be easily misunderstood and lead to confusion about what happens to debt when you die (and who is ultimately responsible for it). So do credit card debts die with you? And what happens to joint debts? In this article we’ll answer all that and more.
Who pays your debts when you die?
Your debts become the responsibility of your estate after you die. The executor of your estate is the person(s) responsible for dealing with your will and estate after your death. The executors or administrators are liable to pay Inheritance Tax on property that forms part of the deceased’s estate, and will use your assets to pay off your debts.
If two or more people have taken out a loan in their names, in most situations the outstanding debt will pass in full to the surviving people who took out the loan.
If there is a mortgage, then your surviving spouse, registered civil partner or co-habiting partner, for example, must pay that mortgage but is not required to pay any of your other debts.
If you are joint tenants, your home does not form part of your estate, except for the purposes of calculating Inheritance Tax. Following the death of one tenant, the surviving tenant automatically gets the deceased’s share (and ownership) of the joint tenancy property.
If you are the sole owner, then again the executor will usually use any assets to pay off debts. Depending on how much is owed, this could potentially involve selling off the property.
The situation is the same if you are joint owners under tenancy in common; that is, the property’s equity is owned in defined shares by two people. After the death of a tenant in common, their share passes not automatically to the survivor (as with joint tenants) but according to the deceased’s will or, if there is no will, via intestacy rules.
A joint mortgage and a joint current account with an overdraft are examples of joint debt.
If there is no insurance
If you don’t have insurance in place, what happens to your debt when you die? The executor of your will should contact the creditors to make arrangements to pay off the debts, assuming they haven’t already made a claim on the estate. If there is no life policy to cover the mortgage and the beneficiaries named in the will or under the rules of intestacy have no wish to obtain, or do not qualify for, a mortgage, then the property may be sold to cover the outstanding debt.
For joint debts:
- You should check the terms of the loan
- Ask the creditors to take out your deceased partner’s name from the bills and transfer all future bills to your sole name.
- If you can’t afford to pay each instalment in full, see if you can renegotiate the repayments to a lower amount, and to a schedule you can manage.
Are families responsible for debt after death?
Debt isn’t inherited in the UK, which means that family, friends or anyone else cannot become responsible for the individual debts of the deceased.
You’re only responsible for the deceased person’s debts if you had a joint loan or agreement or provided a loan guarantee. So in short you aren’t automatically responsible for a spouse’s or registered civil partner’s debts. And while the Personal Representative is not personally liable for the debts of the deceased, those debts are likely to have to be paid from the estate of the deceased.
Do credit card debts die with you?
A common misconception is that any credit card debts are automatically written off. Instead, any individual debts must be paid using the money the deceased has left behind. Only if there isn't enough money in the estate may the debt be written off.
A personal credit card with an outstanding unpaid balance is an example of individual debt.
Once all the debts following a death are paid, the executor might find a debt they knew nothing about. A way to avoid this is to advertise in a local newspaper before you start arranging to pay the debts. This gives the deceased’s creditors time to come forward with any claims.
You aren’t under a legal obligation to place a Deceased Estates Notice, but if you fail to do so, you could put yourself at risk. This is because if you distribute the estate and a creditor then comes forward, you could be found personally responsible. You might therefore have to pay the debt from your own pocket. A period of at least two months should be allowed from the date of the advertisement for the submission of any potential claims on the estate.
How to deal with debts as the executor
One of the tasks the executor may face after the death of a loved one is sorting out their debts and working out what still needs to be paid. As the Personal Representative, here are some of the steps you can take and issues to consider:
- Contact creditors and explain the situation, asking them to send a statement outlining anything still owed.
- Make sure that in the case of an individual debt, like a credit card debt, the bank immediately stops taking any scheduled Direct Debits from the deceased’s bank account.
- Note that in the case of a joint bank account, the surviving partner becomes the sole owner of the account, and remains responsible for any debts.
- If it is a joint debt, then the name of the deceased can be removed from the debt.
- With any luck, the deceased will have put all the relevant documents together – including insurance policies – and will have let someone know where they are or even included such details in their estate plan.
- Remember to check paper records, computers, memory sticks, and cloud-based storage for digital versions of documents.
Once the Personal Representative of the will has probate or grant of administration, the money from the deceased’s estate can be used to pay off any outstanding debts. If the money in the estate runs out before some debts are paid off, the estate is considered to be insolvent. If that applies, there is an order of priority to how the debts are paid. The payment of debts must be completed before the estate can be divided between heirs.
Secured and unsecured debts
Debt comes in different forms, and if you’re wondering what the difference is between secured and unsecured debts, read our summary below.
Secured debts are when the money you borrow is secured against an asset you own, sometimes referred to as ‘collateral’. This means that if you were to default on a loan, your lender could seize the asset and recover money by selling it.
|Type of secured debt||Collateral|
|Mortgage||The property you own|
|Car finance||Your car|
|Secured credit cards||Property, equity or other assets|
|Business loans||Offices, equipment or other assets|
In contrast to secured debts, unsecured debts are where your loan isn’t backed by collateral. Since it is not protected by a ‘guarantor’, you may be charged higher interest for unsecured debts.
Types of unsecured debts include:
- Utility bills
- Bank overdrafts
- Credit card loans
- Student loans
- Personal loans for spending like weddings, holidays and home renovations.
How to pay off someone’s secured and unsecured debts
If someone has passed away and you’ve been tasked with managing the estate, there are different ways you might tackle each secured or unsecured debt.
When it comes to the deceased’s mortgage, the lender still has the right to demand that the mortgage is repaid in full. So as the executor, here are three steps you could follow:
- Find out if the deceased had a life insurance policy. If they do you could make a claim in order to pay off some or all of the mortgage.
- If there is no life insurance, decide whether you want to keep the property and take on the mortgage. You (and anyone else named in the will) have the right to transfer ownership to yourself.
- Alternatively, you can sell the property – known as a ‘probate sale’ – and use the proceeds to repay the lender. You will need to pay any Inheritance Tax due within six months.
Similarly, if the deceased has an unsecured car loan debt, you may decide to sell their vehicle in order to settle the outstanding balance. If the debt is secured, the car finance company may choose to auction the vehicle and claim any outstanding funds from the estate. You will also need to inform the DVLA when the registered car owner has died.
For unsecured debts like personal loans and credit card debts, here are some steps you can follow.
- Locate the original signed loan agreement to see if anyone other than the deceased is listed.
- Contact the deceased’s bank to settle the outstanding debts using money from the estate.
- Confirm that the payment has been processed so the bank can update its records.
It’s worth remembering that only the person who signed the credit agreement can be held personally liable for credit card debts, though the money will still need to be repaid by their estate.
As the executor you will be responsible for settling the deceased’s final utility bills such as water, gas and electricity. Here is how you can repay these debts.
- Inform each utilities company that the account holder is deceased and that you will be paying off the outstanding balance.
- Provide them with any required information, such as the most recent meter reading.
- Pay the final bill using money from the estate and ensure any Direct Debits are cancelled.
What to do if there’s not enough money to pay outstanding debts
If there are insufficient funds in the estate to pay off the deceased’s debts, as well as funeral costs and other expenses, this is known as an insolvent estate. Here are some useful tips, resources and steps you can take to settle the outstanding debts in this scenario.
- Decide on the order in which lenders should be repaid. For example, you could prioritise the largest lender first.
- Speak to family members to ascertain whether the deceased had any assets you were unaware of, such as cars or jewellery, which could be sold to raise funds.
- Check whether they’re due any tax refunds – for example, contact the DVLA to assess their vehicle tax status.
- If you’re waiting to sell a probate property, you could decide to repay the Inheritance Tax from your own funds if you wish to avoid a fine. You could then recover the money when a property has been sold.
- Contact the Law Society if you wish to hire a solicitor to offer independent legal advice.
- Explore some of the resources on GOV.UK for managing debt, such as the Citizens Advice Service.
Should I put my life insurance in a trust?
Writing your policy under trust is a legal arrangement which allows the owner of a life policy (the settlor) to give their policy to a trusted group of people (the trustees), who look after it. At some time in the future they pass it on to some people from a group that the settlor has decided (the beneficiaries). The trustees have discretion about which of the beneficiaries to pass it on to, how much each will get, and when.
Placing your policy under trust ensures a quicker payment, without the need for probate, and as the policy falls outside your estate it could help reduce your Inheritance Tax liability (IHT).
How life insurance can secure your family’s future
Planning for a future where you’re no longer around is not the nicest of topics, but the good news is that our life insurance policies can help make matters easier.
For technical advice on writing your policies under trust, contact Legal & General today.
Find out more about our range of life insurance policies.