What happens to someone's debts when they die?
No one wants to think about their own death, but if you do die unexpectedly your loved ones could be left with a financial headache if you’ve unpaid debts. These will usually be paid off by your estate but unless you’ve made arrangements in advance, this can be confusing for relatives to deal with when they’re grieving.
Key takeaways
Family members do not inherit the deceased’s debts unless they had a joint financial product or they were a loan guarantee
Life insurance policies can be used to pay off unpaid debts after death, usually in this order: secured debts, then priority debts, and finally unsecured debts
Individual debts are settled from the estate, and remaining debts may be written off if funds are insufficient
What happens to your debt when you die?
When a person dies, all their assets, including money, savings, investments, property and debt become part of what is known as their estate. The responsibility for managing the estate is transferred to an executor.
This person is often named in the deceased's will and can be a friend, relative, or solicitor. If they didn’t make a will, and around half of us never do, an administrator will be appointed to do it instead.
Who pays your debt when you die?
It is a common misconception that families or friends inherit the debt of the deceased. However, this is not the case unless there was a joint loan or agreement in place, or if someone provided a loan guarantee.
If you have signed a loan guarantee – when you make a formal, signed promise to be personally liable for someone’s debt if that person can no longer repay it – you will be liable for that debt if the person you have guaranteed dies.
How to pay off debts after death
Dealing with a deceased person's debts can be overwhelming, but the following list can help you to get started:
Paying off debts after death
1. Notify creditors
The first step is to inform anyone the deceased owed money to (otherwise known as their creditors) of the death. They are required to provide a full statement of the outstanding debt.
Executors should be given time to organise the estate, and regular repayments should cease once the death is reported. For joint debts, the deceased's name can be removed.
2. Life insurance cover
Next, check if the deceased had any life insurance in place. These policies pay out upon death and may not be counted as part of the estate if there is a named beneficiary or if the policy has been written in trust.
If there is no beneficiary or they are deceased, the policy proceeds may be used to settle debts.
3. Prioritise debt payment
After funeral expenses and administrative costs, debts should be paid in a specific order: secured debts, priority debts, and then unsecured debts. Executors or administrators could be liable if they distribute assets incorrectly. In the case of an 'insolvent estate' where debts exceed assets, legal assistance may be necessary.
What are the different types of debt?
When a relative dies, you need to work out what kind of debt they left behind. Debt can be individual or joint, and secured or unsecured. Here are some types of debt:
Types of debt
Individual debt
Individual debts are settled from the estate. If the estate is insufficient, they are paid in priority order until funds are depleted. Remaining debts may be written off, and family members without a formal guarantee are not required to pay.
Joint debt
For joint debts, the remaining debt passes to the surviving co-borrowers. Joint mortgages are a common example, where surviving borrowers become responsible for the full debt.
Secured debt
A secured debt is a loan taken out against an owned asset, like property or a car, and must be paid before unsecured debts.
Unsecured debt
Credit cards and overdrafts are unsecured debts and they are paid after secured debts. If a debt isn’t ‘secured’ against a large asset like a car or house, it is known as an unsecured debt.
What debts are written off when someone dies?
In the UK, student loans are written off when someone dies. The loan will be wiped out and the borrower's loved ones will not be responsible for any outstanding balance.
Most other debts, such as credit card debt or personal loans, must be settled by the deceased's estate.
The debts will be paid off in priority order until the money or assets run out. If there isn't enough money in your estate, then any remaining debts are likely to be written off.
Debt collectors may still try and contact the surviving spouse or other family members to oversee the estate but it's illegal for them to harass anyone about paying off the debt.
How long can you legally be chased for debt when someone dies?
Creditors generally have six years from the date a debt became due to claim it from a deceased person's estate. After this period, the debt is considered "statute barred" and cannot be legally pursued through court action.
How to find life insurance with MoneySuperMarket
Planning for a future where you’re no longer around is never pleasant, but having a life insurance policy in place can provide peace of mind and it can cover things like outstanding debts, ensuring. There are fewer financial pressures for your loved ones to deal with if you die unexpectedly.
Finding the right life insurance policy is straightforward when you compare quotes with MoneySuperMarket. Just provide some details about yourself, your circumstances, and the cover you need, and you’ll receive a list of tailored quotes.
You can compare deals by cost and coverage and finalise your purchase with the provider of your choice. It's recommended to balance cost and cover to ensure you have the right policy in place.
Author
Rachel Ditchburn
Former Senior Commercial Manager
Rachel is a former Senior Commercial Manager at MoneySuperMarket, where she oversaw the Protection, Pet and Leisure Insurance channels. Outside of work, Rachel is a keen cook and enjoys live music,...
Reviewer
Rebecca Goodman
Personal Finance & Insurance Expert
Rebecca is an award-winning financial journalist with over a decade of experience writing for print and online media. Her mission is to take the jargon out of personal finance and to help everyone...
