Till debt do us part?

Posted in: Finance Last updated: 29 Jul 2014

What happens to debts when someone dies? It’s a question that remains unanswered for many. We all know how to sort out our own finances, but understanding what to do with a loved one’s debts is a whole different kettle of fish.

Til death do us part (but not your debt)

A common myth is that a person’s debts die with them, but in actual fact, debt is not automatically wiped out – unless provisions have been made to cover it of course. Dealing with someone else’s bills can be complicated, so we’ve whittled down the key things you need to know. Just so that you’re aware, all of the information in this article relates specifically to England and Wales, as some differences in law apply in Scotland and Northern Ireland.

When you won’t have to pay

When someone dies in the UK, no one else ‘inherits’ their individual debts. Instead, what happens is that any money owed comes out of the person’s estate – which is the sum of their property, money and possessions. If there isn’t enough money in the estate to pay off everything owed, it becomes known as an ‘insolvent estate’. This means that debts will need to be paid for in the following order:

1. Mortgages and secured loans

These will be recovered from the value of the property or asset that secures the debt. If this doesn’t cover the whole sum, the remaining balance falls into the unsecured creditors’ category. Unsecured creditors are basically any lender or entity which is owed money.

2. Funeral expenses

So long as the person doesn’t have a Funeral Plan, expenses can be taken from their estate. These will need to be deemed proportionally reasonable though – so you couldn’t spend £3,000 on a funeral if the estate totalled £4,000 and the deceased also had a few thousand pounds of debt. However, you might be able to spend that much if the estate was worth £40,000. It’s also worth knowing that headstones or other personal memorials won’t be classed as  part of the funeral expense. If you pay for funeral expenses from your own back pocket, it could be difficult to claim this back later if there are other creditors involved.

3. Testamentary expenses

There are a multitude of hidden costs that can spring up when dealing with someone’s estate. You need to bear in mind that things like dealing with estate agents and solicitors, writing letters and sending death certificates will incur costs. These kinds of expenses will be deducted from the estate before any further debt is paid.

4. Preferred/preferential debts

This basically refers to any wages, or National Insurance contributions – so for example, this would apply if  the deceased owned a company, privately employed someone or received direct payments for employing carers.

5. Unsecured creditors

When it comes to sorting out payments to creditors, these will need to be made in the following order: debts to local and central government – including any tax liabilities, utility bills, bank loans, credit/store card debts, interest due on unsecured loans, and deferred debts – this might be an informal loan between family members, for example.

The Executor of the Estate - which is usually a solicitor but sometimes a spouse or relative, is responsible for ensuring these debts are paid. In the case of the estate being insolvent, the Executor will need to tell the creditors that there won’t be enough money to foot the bill. 

The Executor is not personally liable for the debts themselves – just for making sure that the money comes out of the estate and lands in the hands of the right people. This may mean selling property and assets to ensure payments are made or posting a notice of an insolvent estate in The London Gazette. This functions as an official journal of record for the British Government, and is checked by creditors to ensure they get any money owed to them.

If the correct procedure is not carried out, the executor could be held accountable by creditors, people or organisations to whom the money is owed. If you’re faced with this responsibility and are unsure on what needs to be done, it’s worth seeking legal advice just to be on the safe side.

When you could be affected

There are a few debts that can be passed over automatically when a person dies. Anyone still living in the deceased person’s house could become responsible for any arrears in household bills, even if their name isn’t actually on the bill.

Additionally, if you have a joint financial product with someone or are a guarantor on one of their financial products, you will become liable for it in the event of their death. So if you have a joint loan or mortgage with your partner, this debt would pass over solely to you as your name is on the credit agreement – even if you weren’t making any payments before this.

If you own a house together

If you jointly own property with someone who has passed away, and there isn’t enough money from elsewhere in their estate to pay for their individual debts, there is a chance you may have to sell the home to repay creditors – even if there is no mortgage on it. This depends on whether you own the home as “tenants in common” which means that both of you own a stated share of the property or “joint tenants”- this is when you own the whole property together.

If property is owned as tenants in common, the deceased’s share would pass to their estate – and in turn to creditors – and you may have to sell it to pay them unless you can negotiate otherwise. However, if you were joint tenants, the deceased person’s share never enters their estate and instead passes straight to you.

Where there’s a will there’s a way?

It’s easy to assume that by leaving property or possessions to your family and friends in your will, this guarantees they’ll be passed to them and be safe from creditors. However, it is in fact a legal requirement that any debts are settled before assets can be given to the beneficiaries. In some cases, this may mean selling a home that someone is already living in, or parting with something of sentimental value that’s been in the family for a long time.

When insurance might help

Some mortgages may be protected by an insurance policy that can shield you from inheriting the joint holder’s share of the debt when they die. Credit cards and loans can also include a payment protection plan that could help clear the balance, and if the deceased was still working, their employer might have offered a ‘death in service’ pay-out that could help pay debts.

It can be frustrating to realise that our families won’t fully benefit from our assets when we’re gone, so if you have debts but still want to leave money to close relatives, you could look for a life insurance policy that gives an option to pay out to a specific beneficiary so you’ll know the money will definitely go to who you want to have it, and won’t be swallowed up. Over 50s life insurance is one kind of life insurance policy that can offer this.

1 The Centre for Social Justice (November, 2012), “Serious personal debt in Britain” [online]. Available from www.centreforsocialjustice.org

Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. OneFamily do not provide advice so it may be worth speaking to an independent financial adviser about your own circumstances.