A leading legal expert reveals what happens to a person’s debt when they die, including who is responsible for paying up and what happens if the money has run out.
There are a lot of misconceptions around debt and inheritance according to Solicitor Nicola Clayton of Atkins Dellow, who says it isn’t as simple as your debt dying with you.
Here Nicola reveals what happens to your debt when you die, and who might be held responsible
What happens to your debts when you die?
When someone dies their debts won’t automatically die with them but they also won’t be ‘inherited’ or passed on to their next of kin or family members – instead the payment of the debt will be paid out by their ‘estate’.
An estate consists of everything a person owns including their home, any other properties, investments, business interests, vehicles and belongings. These will then be sold with the funds going towards settling the debt.
Who has to pay off the debts?
While your debt won’t be passed on to your next of kin, the executor or administrator of your will is responsible for settling any outstanding debts you may have using money from your estate. This usually goes as follows:
- First your executor will collect all of the estate’s assets, then arrange for the payment of any funeral or administration costs.
- Next, the executor will settle any outstanding debts using the estate’s assets.
- Once all debts have been settled the executor can finally distribute the remaining assets to any beneficiaries.
TOP TIP – To make it easier for the person who will be dealing with your estate when you have died, think about keeping a record of any debts which are held in your name and be aware that if debts exceed asset values this means your intended beneficiaries might not inherit anything from your estate.
What if there is no money in the estate?
If there isn’t enough money in the estate, the executor must ensure that the debts are paid off in prescribed order until the money or asset run out:
- Secured debts e.g. banks or mortgage lenders
- Priority debts e.g. HMRC or taxes
- Unsecured debts e.g., credit cards or personal loans
Once the money or assets run out the remaining debts are likely to be written off and will not be passed on to a spouse, civil partner etc. unless they have provided a guarantee on a loan, or the debt is held in joint names.
What happens to mortgage debt?
If you have a mortgage just in your name this will be treated as secured debt and will need to be repaid by your estate as a priority. If fully paid off the property can then pass to the entitled beneficiary, if not the property will be sold and the proceeds used to repay the mortgage.
However, a mortgage on a jointly owned property will usually mean the surviving borrower will be liable for the outstanding amount and will take responsibility for the mortgage.
If you jointly own a property as ‘tenants in common’ you can leave your share in the property to whoever you like and not necessarily the co-owner. In this case, if there isn’t enough money in the estate to repay the mortgage, the beneficiary can choose to take on the responsibility of paying the mortgage to avoid the need to sell the property.
TOP TIP – Always check the wording of any wills as sometimes they may state that the person inheriting the property is responsible for paying the mortgage as well as any other debts secured on the property. This means they’ll now be liable for mortgage repayments and can’t use funds from the estate to settle the amount.
What happens to joint accounts?
Joint accounts, such as those with a bank or building society, are not frozen after death and sole ownership is immediately passed on to the remaining account holder. This means they now own any money or assets in the account but are also responsible for any shared debts, such as a mortgage or overdraft.
For joint mortgages or loans, the outstanding debt will pass onto the other named party or parties but they will not be responsible for any other debts e.g. personal debts or taxes of the deceased.
TOP TIP – Check your insurance policies to see if any cover paying off the debt if the worst should happen – if not, speak to your creditor or lender and see if they can offer a new or alter your policy to provide some peace of mind.
Can Life Insurance be put towards your debts after you die?
Absolutely! Some people even take out life insurance specifically to cover debts when they die, being enough to cover the mortgage and other debts. Arranging life insurance can be a significant part of your estate planning to ensure that your family aren’t left with the burden of paying your debts out of the estate.
It’s very easy to get confused about what happens to your debts if you die; if you need guidance don’t hesitate to get in touch with a legal expert who can offer support, answer your questions and ease any worries you may have.
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