Find out what happens to someone's debts when they die and what needs to be paid
When someone dies, debts they leave are paid out of the money, possessions, and property they leave behind. This is known as their estate. You're only responsible for their debts if you had a joint loan, joint agreement, or provided a loan guarantee. Read on to find out the key things you need to know.
Who pays your debt when you die?
When someone dies, their estate should be used to pay their debts. Their estate includes everything they own, including money, property, and possessions. 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 when you die?
Debt is not inherited in the UK, which means that family, friends, or anyone else do 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, joint agreement, or provided a loan guarantee.
What are the different types of debt?
To organise the debt of someone who has died, you must consider several factors, including what type of debt they have left behind. Debt can be individual or joint, and secured or unsecured.
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.
Secured debt is a loan taken out against something a person owns, such as a property. A mortgage and a loan secured against a car are both examples of secured debt. Secured debts should be paid before unsecured debts.
Unsecured debt is a type of debt that 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.
How to pay off debts after death
Dealing with the death of a loved one after they have died can be extremely difficult, and demands for payments from creditors can add to this stress. However, the process of paying debts after death is structured in three steps. You should follow these steps to help you create a clearer picture of the deceased’s finances and help to settle any debts:
1. Tell creditors that the person has died
Your creditors will likely call or send a letter to request payments. You should let them know that the person has died and that you are going through the legal process of dealing with their estate.
Ask for a letter or statement showing the outstanding balance on the debt. They will usually give you time to organise the estate and sort their debts.
If it is an individual debt, regular payments from the deceased’s account should stop until the debt is settled in full.
If it is a joint debt, the deceased’s name can be removed from the debt.
2. Check if the deceased had any life insurance cover
People often take out life insurance to cover any debts in case they die unexpectedly. You should check if the deceased had any cover and if there was a nominated beneficiary.
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.
If there is no insurance, you’ll need to contact the creditors and make arrangements to pay off the debts if they haven’t already claimed the estate.
For joint debts, you should check the terms of the loan. Ask them to remove the deceased’s name from the loan and transfer all bills to your sole name. If you cannot pay your installments in full, attempt to renegotiate the payments so that they are more manageable.
For individual debts, find out the outstanding balance on the debt. Give the creditor the contact details of the executor or administrator. The executor will pay the debts in priority order.
3. Pay debts in priority order
After paying for funeral expenses and other costs involved with the administration of the estate, you will begin to pay the remaining debts.
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.
Sometimes, there are more debts than an estate is worth. This is known as an ‘insolvent estate’.
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. Once you’ve found the one you want, just click through to the provider to finalise your purchase. We recommend balancing cost and cover to ensure you have the right policy in place.