Who pays your debt when you die?
When someone dies, their estate (everything they own, including money, property, and possessions) should be used to pay their debts. This is usually handled by one or more 'executors' - or an 'administrator'.
An executor is a person (usually a relative or friend and/or a solicitor) named in a will who organises the estate of the person who has died. An administrator will be used if no will was left.
Are families responsible for debt after death?
Debt is not inherited in the UK, which means that family, friends or anyone else does not become responsible for the individual debts of the deceased.
You are only responsible for the deceased person’s debts if you had a joint loan or agreement or provided a loan guarantee.
How to organise the debt of someone who has died?
Prioritise your debts
If you’re an executor of an estate, start by finding out what kind of debts have been left. Different types of debt will need to be dealt with differently, so once you’ve done this you can prioritise paying them off.
You should check if there is a guarantor for any of the debts because if the estate does not cover the cost of the debt, the guarantor remains liable for it.
Is it individual or joint debt?
You’ll need to find out if any debts are held individually or in joint names.
Debts which are in the deceased’s name only can be paid using the value of the estate. If there is insufficient money or assets in the estate to pay off all the debts, then the debts would be paid in priority order until the money or assets run out. Any remaining debts are likely to be written off.
Remember, any surviving family members cannot be required to pay off individual debt, unless they have provided a personal guarantee. If someone dies leaving nothing, then there is no money to pay off the debts and the debts will usually die with them.
If two or more people have taken out a loan in all their names, in most circumstances the outstanding debt will pass in full to the surviving people who took out the loan.
Typically, this happens when someone like a family member has signed a loan guarantee on behalf of the deceased or co-signed a joint loan alongside the deceased.
Loan guarantee: This is when a person makes a signed promise that they will be personally liable for someone’s loan repayments if they can no longer make them. A guarantor is often used by a bank to secure personal loans.
Joint loan: A loan made by two borrowers, whereby you will be responsible for the debt if your partner isn’t able to pay. A joint mortgage, for example.
Is the debt secured or unsecured?
If you’re an executor of an estate, you will need to find out whether any outstanding debts are secured or unsecured.
Secured debt: A loan taken out against something a person owns, such as a property. A mortgage and a car loan are both examples of secured debt.
Unsecured debt: This type of debt is not secured against a large asset (such as a property or car). Examples of unsecured debt could include credit cards, overdrafts, and utility bills.
You should pay off any secured debts first, then unsecured debts.
Did the deceased take out life insurance?
People often take out life insurance to cover any debts in case they die unexpectedly. In most cases, a life insurance policy will pay out a lump sum or monthly payments to a nominated beneficiary and will not form part of the estate. However, if no beneficiary has been nominated the proceeds of the life insurance policy could be used to pay off any debt. This will depend on the terms and conditions of the policy and how it was set up.
What happens if there’s not enough money to pay off the debt?
Sometimes there are more debts that an estate is worth, this is known as an ‘insolvent estate’. Debts must be paid in order of priority:
- Secured debts, such as mortgage repayments
- Priority debts, like income tax and council tax
- Unsecured debts, including utility bills and credit cards
If funds are distributed incorrectly the executor or administrator dealing with the estate could become liable. If you are responsible for an insolvent estate, it might be a good idea to seek help from a probate expert, like an accountant or solicitor, who can help you with the legal process.
Protect your loved ones with a life insurance policy
Planning for a future where you’re no longer around is never nice but having a life insurance policy in place can give you some peace of mind.
Finding the right life insurance policy is easy when you compare quotes with MoneySuperMarket. Just tell us a little about yourself, your circumstances and the cover you need, and we’ll put together a list of quotes tailored to your requirements.
You’ll be able to compare deals by the overall cost and the cover you’ll get, and once you’ve found the one you want just click through to the provider to finalise your purchase. As with all insurance products remember the cheapest option isn’t always the best – we recommend balancing cost and cover to ensure you have the right policy in place.