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What happens to someone’s debt after they die?
Dealing with the estate and finances of a deceased person can always be difficult, especially when the issue is compounded by the grief felt at the person’s death. This problem can become even worse, however, when there are still outstanding debts that need repaying. Knowing who has to deal with that debt, and how they go about doing it, is essential to ensuring the estate is handled properly.
What happens to a person’s debts on their death?
When someone dies their estate will become liable for the debts they still owe. If there is sufficient money or assets left in the estate to cover the cost of the total debts, it will generally be paid before anything can be given to named beneficiaries. If there is still outstanding debt after the estate’s resources have run out, it’s likely that the rest of the debt will be written off.
In the event of there being no money at all to pay off the debts, the debt will usually simply be cancelled. It’s very rare for any surviving relatives, spouses, or dependants to be held liable for those debts except in certain circumstances – namely they acted as a guarantor or co-signed the loan.
Who is responsible for handling the debt repayment?
It falls to the executor or the administrator of the estate to handle the repayment of any outstanding debts on a person’s death. An executor will not usually be held personally liable for any repayments – however, it’s not guaranteed. The assistance of a probate specialist or solicitor is always invaluable, particularly when sorting through the finances of a complicated or large estate.
Where do you start handling the debts of the deceased?
Your first step is going to be getting a clear understanding of what the remaining debts actually are, how much they amount to, and what sort of debts they are. This will involve a detailed examination of financial statements and records, making a note of any outstanding loans. If any of the loans have a guarantor they will need to be contacted, as they will remain liable for any part of the debt not covered by the estate. So, what different kind of debts are there?
Individual, or personal, debts are in the name of the deceased alone – for example, an unpaid credit card bill. They will generally be paid out from the value of the estate, at which point if there is any leftover debt unpaid it will be written off. A spouse, civil partner, or relative won’t be help liable for the repayment of the deceased’s personal debt unless they provided a form of personal guarantee.
When two or more people take out a loan, such as a mortgage or a current account for example, generally any outstanding unpaid debt will pass to the surviving parties who took the loan. If there is an insurance policy in place, it can help to pay off the remaining debt, or a surviving party can get in contact with the loan provider and try to renegotiate the terms of the payments to make them more affordable.
If items are secured against assets, such as a property, it can become more complicated. Even before working out the asset’s value, you must find out who, if anyone, had any joint ownership, and what their stake of the asset was. In the event that the deceased owned the asset outright, it can be used to pay off their outstanding debts if necessary – even if it happens to be in use by a third party. For instance, a house owned by the deceased could be used to pay off a loan secured against it, even if there are tenants living there. If the asset is joint owned, the surviving party to the loan will have to take over the repayments as the deceased’s share will automatically pass over to them.
An unsecured debt is one that hasn’t been taken out against any collateral, such as a property or a vehicle. You can be pursued for these debts, but they cannot repossess anything, and will generally be lower down the list of debts to be repaid in your priority list.
There is always a risk of finding a debt that you didn’t know about, there may have been missing records or the debt was somehow overlooked. You can help avoid this by placing a Deceased Estates Notice in a local paper. This will give any creditors proper notice that the person who took out the loan has died, and that they need to come forward to stake their claim to repayment. You’re not under any legal obligation to put this notice up, however if you repay other debts from the estate and after it has run dry another creditor comes forward with a valid claim, you will have no cause to contest it if you didn’t take reasonable steps to advertise. This may render you personally liable to repay that debt. For the sake of safety, it’s recommended to leave roughly three months from the date of the advertisement before considering undisclosed debt resolved.
How are a deceased person’s debts paid off?
Handling the repayment of a deceased person’s debts can be difficult, but it’s important to be proactive. It’s much better to take the lead and engage on your own terms, rather than waiting for creditors to start pursuing the estate for what they’re owed.
1. Inform the creditors of the death
Once you take over the handling of the estate and you have a list of debts owed, get in contact with each of the lenders in turn. Tell them the person who took out the loan has died, and that you’re currently in the process of sorting through the estate – this will hopefully give you some breathing space. Be sure to ask them to provide you with an official statement showing exactly how much is left to pay, to ensure it tallies with your personal records. At this point they should stop taking their repayments from the deceased’s bank account, until the estate issues full repayment. In the event of a joint debt, this is also the point where the deceased’s name will be taken off the debt and it will fall to the remaining living parties.
2. Check if there is any insurance available
There are certain insurance policies that can pay out to ensure that a person’s debt is repaid in the event of their death – take, for example, insurance to cover the repayment of a mortgage policy. You should check to see if there is any such insurance policy in place.
If there is, check the details of what the policy covers to show you what you can actually claim. It’s important to determine the nature of the policy, what it covers, and how much has been paid into the policy as to whether or not it can pay out. Contact the insurance company as soon as possible to get the claim process started and ensure the debt can be paid off. In the event of a life insurance policy payout, it often skips the estate and goes straight to the beneficiary, but if there is no such beneficiary nominated that payment will go to the estate. It can then be used towards the repayment of any other debts that are outstanding. As ever, it’s essential to closely check the terms of the policy.
If there is no insurance, you will have to make other efforts to repay the debt if a claim has not already been made on the estate. For joint debts, get the deceased’s name taken off the loan, and the other person named can assume the repayments. If they cannot be made, it’s up to that person to renegotiate the terms of the loan repayments to make them more affordable. For a personal debt of the deceased, ask for an official document stating how much is left outstanding on the debt. The debt will then be paid off in order of priority from the estate’s funds.
3. Establishing priority order
Before thinking of paying off any debt, of course the funeral and other administration expenses of handling the estate need to be considered and paid first. Probate or grant of administration will allow you to use the estate’s remaining funds to pay off any debts that aren’t covered by insurance – this takes priority over distributing any promised money to heirs or beneficiaries named within the will.
As a general guide to help you put the debts you find in priority order – first in priority comes secured debts, such as mortgage repayments. Secondly come priority debts, such as income or council tax. Third comes unsecured debts, such as credit card bills or utilities.
If the estate doesn’t have the necessary funds to pay off all of its debts, it’s important to work through the list in priority order. Consider using any assets available, such as a vehicle or property that do not already have debt secured against them, to cover any repayments. If there are more debts than the value of the estate can cover, this will lead it to becoming what’s known as an “insolvent estate”.
What happens if the estate is insolvent?
The first thing to remember is that you, as an executor or administrator of the estate, cannot be held personally responsible for debts that the deceased took out on their own. Nor can any spouse, partner, child, or other relative. If the deceased took out personal loans or unsecured loans and there isn’t enough money in their estate to pay them, the chances are the balance of the loan will be written off.
The only debt that will be pursued beyond the value of the estate is debt that had multiple signatories, a guarantor, or was secured against an asset such as a car or a home. These are independent of the estate – so the other signatories will become liable to take the deceased’s share of any remaining debt, and whatever the loan was secured against can be repossessed and sold to cover the outstanding debt.
The important thing to do is not panic – despite what you might think, and how some people portray them, most companies will be very receptive to you making an effort to contact them to resolve the debt of a deceased person. They will give you any help and assistance they can, make it as simple as possible to understand what’s owed, and how you can go about making the necessary payments. In many cases the debt will simply be cancelled.
If you’re worried about leaving debt after you die
If you’re worried about leaving debt for your loved ones to deal with after you die, be sure to keep your finances in the best possible order. Repay loans as timely and efficiently as possible. Keep your financial records in a clear, easily accessible file – to make it simple for the executor of your estate to understand what is still owed if they need to determine your levels of debt and how much is still outstanding.
If you have large debts, such as a mortgage, it’s wise to consider taking out an extra insurance policy to ensure that there will be assistance available if you die and the rest of the debt needs to be paid off. It’s not something anyone “wants” to do, to consider their own mortality, but it’s important to make it as simple as possible for your loved ones to track your finances in the event of your death. They will be grieving enough as it is, they will not need the extra stress that comes from having to dig through multiple strings of paperwork to put the puzzle pieces together.
Keep your financial affairs in clear order, and make provisions if possible to ensure there is assistance there to help with payments on your death to make it as easy as possible for those you leave behind.