Debt After Death – a Complete Guide

When someone dies, they may leave behind debts. These are paid out of the estate left by the person who passed away. The estate is essentially the value of everything the deceased leaves behind when they die. The executor – the person responsible for handling the deceased’s estate – will normally use any assets from the estate to pay off the debts. They’ll need to apply for probate, which is the legal right to deal with the deceased’s estate, before they can pay off the debts. They must also estimate the value of the estate before anything else is done, in case inheritance tax needs to be paid.

If there isn’t enough money in the estate to pay off all the debts, the debts will likely be prioritised so the largest are paid off first. Once the money runs out, any remaining debts will typically be written off.

Don’t worry, you don’t inherit debt in the UK. This means that a spouse, partner, children and other family members, including executors, are not personally liable for the debt, unless:

They had a joint loan or agreement with the deceased person

They acted as a guarantor for them – for example, for a loan or mortgage

They distribute the estate before all creditors have come forward.

The executor or executors will handle paying off the deceased person’s outstanding debts. An executor is normally a relative or friend, although a solicitor can also be an executor. An executor(s) may want to get help from a solicitor, especially if the estate is large or complicated.

If the deceased person didn’t leave a will, the people who handle their affairs are known as administrators and have the same responsibility to see that outstanding debts are paid off.

If you’ve established that the deceased person has an estate and debts, the next stage is to work out how much these debts are and what kind of debts they are. Go through their financial documents and make a list of everything they owed.

Top tip

The executor or administrator should make sure the deceased’s bank stops making direct debit, standing order or regular payments immediately, so it’s clear exactly what was owed at the time of death. This may also mean a partner or spouse of the deceased needs to quickly switch household bills into their name. This will be less of an issue for bills that are paid out of a joint account as the account will become the sole responsibility of the surviving person.

The typical kinds of debt that people could leave behind when they die include:

Car loans

Credit card bills

Mortgages

Overdrafts

Personal loans

Student loans.

How and when the debts will be paid off depends on what type of debts they are:

Individual debts

Individual debts are only in the name of the person who’s died, for example, a credit card. They can be paid off using their estate.

Joint debts

Joint debts are in the name of the person who’s passed away, plus one or more people – for example, a joint mortgage or loan.

If there are joint debts, the executor and surviving person will need to get the deceased person’s name taken off the paperwork and the debt transferred into the survivor’s name. The survivor may be able to renegotiate the term of the loan if they can no longer make the repayments in full.

Secured debts

A debt can be secured against an asset the deceased person owned, such as property or a vehicle. If the debt hasn’t been paid off before that person died, for example a homeowner loan or car finance, the lender will recover the asset to use as payment.

Unsecured debts

Unsecured debts, like a personal loan, aren’t secured against an asset like a house or car, so lenders can’t take these to repay the debt. However, they can get in touch with the executors or administrators to discuss payment arrangements.

Undisclosed debts

An undisclosed debt is one the executors or administrators didn’t know anything about. If the executors or administrators split the estate between the beneficiaries and a debt is then discovered, or creditors pursue the deceased person for the debt, then the executors or administrators may have to pay the debt themselves.

To avoid this happening, you can place a Deceased Estates Notice in The Gazette and a local newspaper. A Deceased Estates Notice is a statutory advertisement that shows effort has been made to find any remaining creditors and protects the executors or administrators from being liable for undisclosed debts. It can also alert creditors to the death of the person with the debt. Leave two months and a day for them to come forward.

Once probate has been passed, the executor can use money from the estate to settle outstanding debts by following these steps:

Step 1: let all creditors know the person has died

This should stop creditors from trying to contact the deceased or take further payments, which can be stressful when you’re grieving and also trying to deal with the estate.

A good place to start is the government service Tell Us Once. They’ll notify government organisations, like the Department for Work and Pensions (DWP) and the Passport Office, all in one go.

Ask any creditors for a statement with the outstanding debt so you know what needs to be paid. Once you’ve been granted probate, you can send them a copy of the grant of probate document to prove you have a legal right to deal with the estate.

Step 2: check whether they took out insurance

People often take out life insurance to cover debt repayment in case they die unexpectedly. If they did take out insurance, check the policy to find out if you can claim. Also check whether they had death in service benefit, which pays out a lump sum if a person dies while employed by a company.

The payment from a life insurance policy will normally go to a beneficiary, who can use it to pay off debt: for example, a mortgage. However, the payment could become part of the estate if the deceased person didn’t nominate a beneficiary. With a life insurance policy in trust, its value won’t be counted as part of your estate and the pay-out is protected from being used to pay off any outstanding debts.

If there’s no insurance, you’ll need to contact the creditors to make arrangements to pay off the debts from the estate. These must be paid off in priority order.

Step 3: pay off the debts in priority order

Before any debts are paid, you’re allowed to cover any essential costs involved in organising the funeral and estate administration.

These can include:

Costs for cleaning and clearing a property

Funeral Expenses

Legal fees for selling a property

Other legal fees

Postage costs

Probate Registry fees

Cost of sorting inheritance tax with HMRC

Travel costs

Valuation services.

You can then use the rest of the money from the estate to pay off any debts that aren’t covered by insurance.

Debts must be paid in the following order:

1. Secured debts, such as a mortgage

2. Priority debts, which can include:

Bills, such as gas, electricity, phone and internet

Council tax arrears

Court fines

Overpaid tax credits

Payment for goods bought on hire purchase or conditional sale

Rent arrears

TV licence payments

Unpaid child maintenance

Unpaid taxes.

3. Unsecured debts, which can include:

Catalogue debts

Credit card debt

Money owed to family and friends

Overpaid benefits

Store card debt

Unpaid parking tickets

Unpaid water bills

Unsecured loans.

Only when all debts and taxes have been paid can the executor distribute the rest of the estate to the parties listed in the will.

Top tip

It can be a good idea to get multiple copies of a death certificate as most finance providers will ask for a copy.

There may be more debts than the estate is able to pay. If this is the case, the estate is known as an insolvent estate. The debts must still be paid off in the priority order listed above, until the money runs out.

If you’re responsible for an insolvent estate, it’s a good idea to get help from a probate expert, typically an accountant or solicitor.

Paying off someone else’s debts can be stressful. But there are ways to manage the situation. Debt advisors can help you by suggesting ways to pay off the debts, including pointing you towards help that’s available. These services are free from judgment and may offer solutions you hadn’t considered or known about before. Many of them are also free to access.

Where to find free advice on debt

Financial Wellness Group

National Debtline

StepChange Debt Charity

When do you need to pay inheritance tax?

If a deceased person’s estate is valued at £325,000 or more, then it will be liable for inheritance tax, which is paid before probate can begin and outstanding debts are paid off.

However, there’s no inheritance tax to pay if:

The estate is left to a spouse or civil partner

The estate is valued at less than £325,000 (or below £500,000 if the deceased’s home is left as part of the estate to children or grandchildren).

What is probate?

Probate is the legal right given to an executor or administrator of a will to deal with the deceased person’s estate, including paying off their debts.

You don’t always need probate. For example, if the person who died only owed a small amount of money and didn’t own property, or they jointly owned assets, you’re unlikely to need probate.

How do you apply for probate?

The executor(s) named in the will can apply for probate. You can do this online on GOV.UK or by post.

If it’s granted, you’ll receive a grant of probate. You can send copies of this document to the relevant organisations to prove you have the legal right to deal with the deceased person’s estate.

Does credit card debt die with you?

Contrary to popular belief, credit card debt doesn’t automatically get written off when someone dies. Although only the person who took out the credit card agreement is liable for the debt, any money owed on outstanding balances will be taken from their estate after priority debts have been paid.

Credit card debt can only be written off if there’s no money left in the estate to pay it.

What happens to my mortgage when I die?

If there’s a mortgage on a jointly owned property, then the details of the mortgage arrangement come into play. If you’re:

Tenants in common – the deceased’s share can be taken into account when paying back debts and will pass to whoever they’ve named in their will, or according to the intestacy rules as appropriate.

Joint tenants – the surviving tenant will automatically get the deceased’s share and ownership of the property.

If the remaining mortgage holder wants to stay in the property, they’ll have to continue paying the mortgage in full every month. This is why many people opt for life insurance that will pay out enough to pay off the outstanding mortgage.

What happens to your debt when you die if you have no estate?

If there’s no estate – as in no property, money or any other assets to pay off the debts – those left behind won’t be required to clear the debts themselves unless they were joint account holders or acted as a guarantor.

If there’s no money to pay off your individual debts, they’ll usually die with you.

What happens to hire purchase agreements after you die?

Hire purchase is used to pay for something over time, like a car, but the item doesn’t belong to you until the final payment is made. If the buyer dies before that, the executor should check to see if there’s an insurance policy in place that will pay off the agreement on death. If that’s the case, the item would become part of the estate.

Otherwise, you’ll need to consider your options, as hire purchase agreements can be complicated. The creditor or a debt advice service will be able to help.

Guide provided by Comparethemarket