What happens to debt when you die?
Thinking about and dealing with the debts of a deceased person is not a cheery thought. But it’s an important subject and because it’s rarely talked about, can be easily misunderstood and lead to confusion about what happens to debt when you die, and who is ultimately responsible for it. So do credit card debts die with you? And what happens to joint debts? In this article we’ll answer all that and more.
Who pays your debts when you die?
Your debts become the responsibility of your estate after you die. The executor of your estate is the person(s) responsible for dealing with your will and estate after your death. The executors or administrators are liable to pay Inheritance Tax on property that forms part of the deceased’s estate, and will use your assets to pay off your debts.
If two or more people have taken out a loan in their names, in most situations the outstanding debt will pass in full to the surviving people who took out the loan.
If there is a mortgage, then your surviving spouse, registered civil partner or co-habiting partner, for example, must pay that mortgage but is not required to pay any of your other debts.
If you are joint tenants, your home does not form part of your estate, except for the purposes of calculating Inheritance Tax. Following the death of one tenant, the surviving tenant automatically gets the deceased’s share (and ownership) of the joint tenancy property.
If you are the sole owner, then again the executor will usually use any assets to pay off debts. Depending on how much is owed, this could potentially involve selling off the property.
The situation is the same if you are joint owners under tenancy in common; that is, the property’s equity is owned in defined shares by two people. After the death of a tenant in common, their share passes not automatically to the survivor (as with joint tenants) but according to the deceased’s will or, if there is no will, via intestacy rules.
A joint mortgage and a joint current account with an overdraft are examples of joint debt.
If there is no insurance
If you don’t have insurance in place, what happens to your debt when you die? The executor of your will should contact the creditors to make arrangements to pay off the debts, assuming they haven’t already made a claim on the estate. If there is no life policy to cover the mortgage and the beneficiaries named in the will or under the rules of intestacy have no wish to obtain, or do not qualify for, a mortgage, then the property may be sold to cover the outstanding debt.
For joint debts:
- You should check the terms of the loan
- Ask the creditors to take out your deceased partner’s name from the bills and transfer all future bills to your sole name.
- If you can’t afford to pay each instalment in full, see if you can renegotiate the repayments to a lower amount, and to a schedule you can manage.
Are families responsible for debt after death?
Debt isn’t inherited in the UK, which means that family, friends or anyone else cannot become responsible for the individual debts of the deceased.
You’re only responsible for the deceased person’s debts if you had a joint loan or agreement or provided a loan guarantee. So in short you aren’t automatically responsible for a spouse’s or registered civil partner’s debts. And while the Personal Representative is not personally liable for the debts of the deceased, those debts are likely to have to be paid from the estate of the deceased.
Do credit card debts die with you?
A common misconception is that any credit card debts are automatically written off. Instead, any individual debts must be paid using the money the deceased has left behind. Only if there isn't enough money in the Estate may the debt be written off.
A personal credit card with an outstanding unpaid balance is an example of individual debt.
Once all the debts following a death are paid, the executor might find a debt they knew nothing about. A way to avoid this is to advertise in a local newspaper before you start arranging to pay the debts. This gives the deceased’s creditors time to come forward with any claims.
You aren’t under a legal obligation to place a Deceased Estates Notice, but if you fail to do so, you could put yourself at risk. This is because if you distribute the Estate and a creditor then comes forward, you could be found personally responsible. You might therefore have to pay the debt from your own pocket. A period of at least two months should be allowed from the date of the advertisement for the submission of any potential claims on the estate.
How to deal with debts as the executor
One of the tasks the executor may face after the death of a loved one is sorting out their debts and working out what still needs to be paid. As the Personal Representative, here are some of the steps you can take and issues to consider:
- Contact creditors and explain the situation, asking them to send a statement outlining anything still owed.
- Make sure that in the case of an individual debt, like a credit card debt, the bank immediately stops taking any scheduled Direct Debits from the deceased’s bank account.
- Note that in the case of a joint bank account, the surviving partner becomes the sole owner of the account, and remains responsible for any debts.
- If it is a joint debt, then the name of the deceased can be removed from the debt.
- With any luck, the deceased will have put all the relevant documents together – including insurance policies – and will have let someone know where they are or even included such details in their estate plan.
- Remember to check paper records, computers, memory sticks, and cloud-based storage for digital versions of documents.
Once the Personal Representative of the will has probate or grant of administration, the money from the deceased’s estate can be used to pay off any outstanding debts. If the money in the estate runs out before some debts are paid off, the estate is considered to be insolvent. If that applies, there is an order of priority to how the debts are paid. The payment of debts must be completed before the estate can be divided between heirs.
Putting your life insurance in trust
Writing your policy under trust is a legal arrangement which allows the owner of a life policy (the settlor) to give their policy to a trusted group of people (the trustees), who look after it. At some time in the future they pass it on to some people from a group that the settlor has decided (the beneficiaries). The trustees have discretion about which of the beneficiaries to pass it on to, how much each will get, and when
Placing your policy under trust ensures a quicker payment, without the need for probate, and as the policy falls outside your estate it could help reduce your Inheritance Tax liability (IHT).
How life insurance can secure your family’s future
Planning for a future where you’re no longer around is not the nicest of topics, but the good news is that our life insurance policies can help make matters easier.
For technical advice on writing your policies under trust, contact Legal & General today.
Find out more about our range of life insurance policies.