What happens to debt after you die?
It’s never nice to think about what will happen when you die, however, it is important to plan ahead so that your loved ones aren’t left with unnecessary stress.
Making a Will is one of the main ways of organising your affairs and setting out who is responsible for your property, assets and finances after your death. But something that is often forgotten about is debt and what happens to it when you die.
Who pays your debts after you die?
When you die, your debts form part of your estate. The Executor/s of your estate are therefore responsible for dealing with your debts as part of the estate administration process.
In the UK, debt is not inherited, which means that you don’t have to worry about your loved ones becoming responsible for paying your debts out of their own pockets. The Executor/s will use your assets or sell your property to pay outstanding debts.
Friends and family only pay or contribute towards a debt if it is joint.
Joint debts
If two or more people have taken out a loan in their name, e.g. a mortgage, the outstanding debt will normally pass to the surviving party. For example, if a married couple have a joint mortgage on their home and the husband dies, the wife will be responsible for paying off the remainder of the loan. This applies to married couples, civil partners and cohabitees.
What counts as a debt?
The majority of people have debts, whether individual or joint. Common examples of debt include:
- Credit cards
- Mortgages
- Car finance
- Bank loans
- Student loans
- Utility bills
Debts are categorised as either ‘secured’ or ‘unsecured’. Secured debts relate to loans associated with a physical entity such as a house (mortgage) or car loan. Unsecured debts relate to anything not ‘backed’ by collateral or secured against an asset, e.g. credit cards.
How to pay off someone’s debt
If your loved one has died and you are responsible for dealing with their debts, it is a good idea to seek legal advice. A probate solicitor can advise you on how to pay debts as part of the estate administration process, taking some of the stress away meaning you can rest assured that matters are in safe hands.
Mortgages
Lenders have the right to demand the mortgage be repaid in full. As Executor, it is helpful to follow the below process:
- Find out if the deceased had a life assurance policy. This may help pay off part or all of the mortgage.
- Check the Will to see if it specifies if a gift of the property to a Beneficiary includes the mortgage and if not, if there are sufficient other assets that can cover the mortgage.
- Decide whether you want to keep the property and transfer ownership (and take on the mortgage) to yourself. Executors and Beneficiaries have the right to do this, subject to the mortgage provider’s consent.
- If you do not want to keep the property, you can sell it and use the proceeds to repay the lender.
Car loans
If your loved one had a car on finance, you can sell it to settle the outstanding balance. Alternatively, the car finance company may choose to sell the vehicle at auction and claim any outstanding funds from the estate.
Don’t forget to inform the DVLA that the registered owner of the car has died.
Utility bills
Utility bills such as water, gas and electricity will need to be paid using money from the deceased’s estate. You should first inform each utility company of the account holder’s death and provide them with meter readings so that they can issue an up-to-date bill.
Once the deceased’s property is sold or transferred, a final bill will be issued which can be paid using estate funds. Don’t forget to cancel the Direct Debit!
Loans
With unsecured debts such as credit cards and personal loans, any outstanding balance will need to be paid by the estate.
If it is only the deceased on the loan agreement, the Executor/s will need to contact their bank to pay the outstanding debt using money from their estate.
What happens if there isn’t enough money in the estate?
If the money in the estate does not cover the deceased’s debt, it is known as an insolvent estate. In this case, there are some things you can do to help settle the outstanding debts:
- Sell their property if they had one
- Sell any high-value assets they had (speak to their friends and family in case there are any you were unaware of)
- Check whether the deceased was due any tax refunds
- Under the Insolvency Act 1986, there is a statutory order of payment that should be followed with the funeral, testamentary (e.g. legal fees) and administration expenses paid first, followed by secured creditors etc.
If your loved one has died without having sufficient funds to pay their debts, it is wise to seek legal advice as soon as possible. The law around intestacy can be complex, so having an experienced probate solicitor at your side can make a real difference.
Contact our probate and estate administration solicitors
If a loved one has died and you aren’t sure where to start, a good place is to speak to our friendly Probate + Estate Administration team. We can also help if you are planning for the future and want advice on writing a Will that reflects your wishes.
Call us on 0117 325 2929 or fill out our online enquiry form.