What happens to someone's debts when they die?
Key takeaways
Family members do not inherit the deceased’s debts unless they had a joint financial product – or acted as a guarantor on a loan
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 usually 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 is taken into account as part of their estate. Responsibility for managing the estate is transferred to an executor.
An executor is usually named in the deceased's will and can be a friend, relative, or solicitor. If there is no valid will, an administrator is appointed to carry out a similar role.
📣 Did you know: More than half (53%) of adults aged 50-64 – and 22% of those aged 65 and over – do not have a will, according to the Money and Pensions Service (MaPS)
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 acted as a guarantor on a loan.
If you have signed a loan guarantee – you make a formal, signed promise to be personally liable for someone’s debt if that person can no longer repay it. This means you could be liable for any outstanding debt if the borrower dies.
How to pay off debts after death
Dealing with the debts of a deceased person can be overwhelming, but the following list can help you to get started:
1. Notify creditors
The first step is to inform anyone the deceased owed money to (otherwise known as their creditors) that the person has died. Creditors 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 – or loved one – 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:
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, Government 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 and overdrafts, must be settled by the deceased's estate.
The estate’s assets are used to repay debts in a set order of priority. If there isn't enough money in the 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 find out who is administering the estate. However, they cannot demand that family members repay the debt unless they were jointly liable for it – or acted as a guarantor. It is also illegal for debt collectors to harass people about a 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, most unsecured debts become what is known as ‘statute barred.’ Once this happens, creditors cannot usually take court action to recover them.
When acting as an executor, it’s essential to ensure all known debts are dealt with before distributing any inheritance.
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. 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 then compare deals by cost and level of cover – to find the right policy for your needs.
Author
Esther Shaw
Money expert
Esther Shaw is an award-winning consumer, financial and property journalist with more than two decades of experience. As a freelance writer, she regularly contributes to a range of national titles...
Reviewer
Beth Leslie
Senior Insurance Content Editor
Beth is an experienced writer and editor who specialises in financial and economic content. She is currently the Senior Insurance Content Editor for MoneySuperMarket. Beth is passionate about making...
