What happens to your debt when you die?
When someone dies, their debts don’t necessarily disappear. They are often passed on to the whoever was named as executor or administrator in their will. Which can make dealing with the already difficult situation of their death much more stressful.
This is assuming the deceased had a will. If they died without a will, like Prince, then things can start to get a lot more complicated, but either way, the rules are the same.
The ‘estate’ is the name given to someones cash sum after they have died. Basically, anything they have that is worth anything. This can include investments, property and possessions as well as money from life insurance. Digital assets need to be dealt with separately.
Like we talked about in our guide to intestacy, someone’s estate is handled by one or more ‘executors’ – or an ‘administrator’ if there wasn’t any will. These are usually a relative or friend and/or a solicitor. The executor must then apply for a grant of representation. Once they get ‘probate’ they have permission to look after the assets (and any debt).
Before the executor, administrator and possible solicitor get to divvy up the estate in regards to the will, they must first settle the debt of the deceased. Often, there is enough money put aside to pay these. Sometimes part of the estate must be sold (property, stocks, belongings etc.) Sometimes, there still isn’t enough to pay off the debt, let alone leave anyone anything.
What debts need to be paid?
Different types of debt get different priority over each other.
- At the top of the list are ‘secured debts’ these are debts that against an asset. Common examples are a mortgage for a house or a car loan.
- The second is the funeral costs and the administrative costs that go into distributing the estate.
- Third are ‘unsecured debts’ these can be any other outstanding payments the descaled person has and include (but are not limited to) personal loans, or a student loan. It also includes credit cards, utility bills, unpaid rent, and Council Tax.
Can you inherit debt?
You can only inherit debt if you have a financial association. Which can be a joint account or being a guarantor.
- Individual debt is something like an unpaid credit card bill or a bank overdraft. This is most likely to be paid for by the estate, and will not be inherited. This is when a payment protection plan is a good idea. Although they have a bad rep in recent years. If they are used correctly they can be very useful.
- A joint debt, for example, a joint mortgage or a bank account. This debt can be inherited if someone is part of a shared credit agreement with the deceased.
- Joint mortgages (as in ‘a joint tenancy’) generally speaking, these automatically transfer to the surviving spouse. However, in the situation of ‘tenants in common’ and property was owned individually, debts would be paid for out of the estate. Then, if the property is left to someone via the will, it gets left to them.
How to pay
- Tell creditors that the person has died. This can give you more time to put things in order. It should also stop direct debit payments being taken out of the deceased’s accounts.
- Check if there’s insurance. Some life insurance policies can pay off mortgages outright, and some include a form of payment protection Insurance (PPI) although generally, this only applies in unemployment or long periods of illness. Not death. If there is no insurance then you must renegotiate a payment plan until the debt is settled.
- Pay in the debt priority order mentioned above.
If you are in a situation where you are unable to pay the debt. Or currently have debt problems of your own,d then contact a debt advisor or the Citizens Advice Bureau.