What happens to my debt when I die?

The period after the death of a loved one is a difficult time; and many people prefer to avoid thinking about it in advance. There are many challenges to consider; not only the emotional difficulties, but also the administrative duties that will need to be dealt with. 

An example of this is when the deceased has outstanding debts upon their death. Matters such as these become even more difficult to handle when the debt is unexpected and no provisions for its repayment have been made. It is a commonly held assumption by many people that debts are written off upon the death of the borrower; however, in general, this is not true. 

When someone dies, their assets are collected to form their estate. This is overseen by someone named in their Will (an Executor) or the next of kin if there is no Will (an Administrator). In both situations, any debts left would be paid out of the estate. 

If the estate's assets do not cover all the debts, the creditors get paid in order of priority. After the funeral bill and any Inheritance Tax that may need to be paid, Mortgages (and any other secured creditors) are deemed to be most important type of arrears; following that are rent payments, water bills, council tax, loans, and credit cards (unsecured creditors). Beneficiaries can only enforce their rights once all the debts have been repaid. 

Who needs to pay off debts? 

It is the responsibility of the Executor or Administrator to pay off any debts of the estate. Whilst being an Executor or Administrator does not mean you are personally liable for the estate’s debts, taking on the responsibility of these roles does come with some risks. 

In order to protect yourself from any potential creditors, it is often advisable to put a notice of the death in a newspaper, locally to where the deceased lived. This would invite creditors to register an interest in the estate, so all debts of the deceased can be noted and paid before distribution to beneficiaries (see our note below on undisclosed debts). If the estate is large or complicated, then you should consider seeking the advice of a Solicitor or probate specialist. 

What is the process of dealing with the debts? 

Firstly, the details surrounding any debts which have been left need to be obtained and collated together, including clarifying what kind of debts they are. It is good practice to go through any documents (such as financial statements) and make a list of everything that’s owed. 

Secondly, you should check if any of the debts have a guarantor attached to them. If so, then the guarantor will remain responsible for any debt covered by a guarantee if it is not paid by the estate. 

The process of dealing with specific debts then depends on the category it falls under, so it’s important you find that information out so each debt can be dealt with correctly. 

What are the different types of debts? 

Individual debts 

Debts that are only in the deceased’s name can be paid from the estate. One example of an individual debt is a personal credit card that has an unpaid balance. If the assets are insufficient to pay off the debt, the debts will be written off. Individual debts can be secured or unsecured. Family members such as a surviving spouse, civil partner, or relatives are not required to pay off individual debts from their own finances. 

Joint debts 

When two or more people have taken out a loan in all their names, in most situations the remaining debt will transfer to the surviving people who took out the loan. For example, if two people take out a joint mortgage, then the surviving person remains responsible for the debt following the death. 

It is advisable to check if there is an insurance policy to pay off the debt. If one is not in place, the next course of action is often contacting the creditor to check the terms of the loan. 

Secured debts 

Secured debts can be more complicated. This is when a debt is secured against a particular item; for example, if a loan is secured against a property. Before working out the value of an asset, such as a property, it’s important to find out the details of the purchase and how it was owned. 

If a property is jointly owned by two or more people (one of whom has died), the deceased’s share of the property automatically passes to the other owner(s). The mortgage would normally pass to the remaining owner(s) as well. Only the deceased’s share of the property and the deceased’s share of the mortgage will form part of the estate. However, the deceased’s mortgage does not normally need to be paid from the estate as the remaining owner(s) will continue to be responsible for making any mortgage repayments. 

Situations involving tenants in common differ to this. As only a specific share of the property is owned, this is taken into account when debts are required to be repaid. If you are unsure who owns the property, the Land Registry can provide this information for properties registered in England and Wales for a small fee. If the property isn’t registered, then the next step is to check the deeds. 

Unsecured debts 

An unsecured debt is one which is not secured against a particular item. Creditors who are reclaiming an unsecured debt will usually need to wait until the other debts, which are deemed to be a higher priority, have been paid first. For example, debts are paid relating to rent payments first, then followed by water bills, council tax, loans, and credit cards 

Undisclosed debts 

It is possible that another debt emerges, even after you have considered all previously known debts to have been paid. It should be noted that there isn’t a legal obligation to place a Deceased Estates Notice in a local newspaper, however, if you fail to do so, you could be at an increased risk in the future. For example, if you distribute the estate and a creditor then comes forward, you might be found personally responsible. In this instance, you could have to pay the debt yourself. 

What help is available? 

In order to ensure that all processes are carried out correctly and efficiently, you could use a specialist service provider to assist you. Here at Kings Court Trust, we can deal with the entire estate administration process, including paying any debts, on the behalf of the Executor or Administrator. 

Kings Court Trust is a specialist provider that offers award-winning solutions for probate and estate administration. If you have any questions about probate, estate administration, or understanding Trusts, call our Client Services Team on 0300 303 9000 or fill in the form below.