There are a lot of misconceptions out there about what happens to debts when you die.
Many people believe that the debt is transferred to your spouse or other loved one(s) while others believe it’s completely written off.
Today, I’ll be discussing exactly what happens when you die with debt as it’s much more nuanced than it seems.
A lot of it depends on what type of debt it is and the number of assets you had when you died.
Does Debt Die with You?
This question does not have a simple yes or no answer.
Sometimes with unsecured debts such as credit card debt, creditors do write off the debt but they are not required to do so.
Use our free letter template to ask a creditor if they would write off the outstanding debt left after the death of a loved one.
In general, when someone dies, the debts that they leave behind become a liability on their estate.
When I refer to a deceased person’s “estate”, what I’m referring to is:
- Any money that they have in their bank account.
- Any valuable assets they have such as a car or jewellery.
- Any property that they own.
The executor or administrator of the estate is then responsible for paying off any outstanding debts. Keep in mind that they pay off these debts from the deceased person’s estate, they are not personally responsible for the debts.
All the money in the estate as well as other assets are utilised until all the debts are paid. If there is not enough money or assets in the estate to pay back the debts in their entirety, then they must be paid in a certain priority order.
This order is as follows:
- Secured debts, for example, mortgages.
- Priority debts, for example, council tax arrears and income tax arrears.
- Unsecured debts such as credit cards or unsecured loans.
Who is Responsible for the Debt of a Deceased Person?
Of course, this is one of the main sources of confusion when discussing the debt left behind when someone dies.
When it comes to credit card debt, the law states that only one person is allowed to be the primary cardholder. This means that only one person can be liable for the outstanding balance on a credit card.
Keep in mind that even if you’re an additional cardholder on a credit card, you will still not be liable for the outstanding balance on it.
That being said, there definitely are some cases which you definitely need to be aware of.
Firstly, as stated earlier, the estate of the deceased person will be used to pay off any debts that they left behind (including credit card debt).
If you jointly owned any property with the deceased person, you will have to clarify whether you were ‘joint tenants’ of the property or if you were ‘tenants in common’.
If you and the person who passed away were joint tenants of a property, this means that both of you owned the property jointly (or equally).
In this case, when they passed away, the sole ownership of that property would be passed onto you. Creditors will not be allowed to force the sale of this property in order to pay off the debt that the deceased person owed to them.
Tenants in Common
Tenants in Common refers to having a share in a property. This means that you may have held 50% of a share in a property and the deceased person may have held a 50% share as well.
If this is the case with any property left behind by the deceased person, then creditors can definitely force the sale of this property in order to pay for the debt(s) owed to them.
Important Note for the Executor
If you are the executor of the estate of a person that passed away, it’s a good idea to consider placing a deceased estates notice in your local newspaper. This is because you may not be aware of all of the outstanding debts that the deceased person may have left behind.
A notice in the local newspaper gives creditors the heads-up to step up and contact you in case the deceased person owed a debt to them.
It’s a good idea to do this before you start distributing the estate of the deceased person among creditors in order to pay off the debt.
This is because if you distribute the estate to all the creditors that you are aware of and then another comes forward, then you may be personally responsible for the debt. You may definitely be able to dispute this but it cost a lot of time and resources. If you publish a deceased estates notice in the paper, it will protect you from any liability for creditors that did not come forward.
Can Creditors Take My Life Insurance Benefits from My Beneficiaries?
There are certain things your creditors are not allowed to take in order to pay off your debts after your death; This includes the benefits that your beneficiaries get from any life insurance policy that you may have taken out as well as money in your retirement bank account.
The proceeds from your life insurance policy go straight to your beneficiaries and are not considered to be a part of your estate.
That being said, it’s important to note that if your beneficiaries have debts of their own, then the life insurance benefits they receive will not be safe from their creditors.
Another important thing to keep in mind is that if the beneficiaires you have named in your life insurance policy are deceased as well, then the proceeds of the life insurance could be added to your estate. In that case, this money could be used to pay off your debt after you die.
How Do Debts of a Deceased Person Get Paid?
As mentioned throughout this post, the debts of a deceased person are paid off using the person’s estate which essentially encapsulates all of the money they had to their name as well as any assets they had. But how does this really happen?
Firstly, the funeral costs as well as any administrative costs for settling the estate can be paid using the person’s estate before attending to any outstanding debts.
Code of Conduct if You are the Executor
After this, a probate or grant of administration is put in place so that the executor (or administrator if no will was written) can start paying off the debts using the estate.
It’s a good idea to first get a complete list of all the creditors the deceased person owed any debt to. As mentioned earlier, it’s a good idea to have a deceased estates notice in the local newspaper so you can track down any creditors you weren’t aware of.
Once all of the creditors are identified, it’s a good idea to contact all of them and inform them that the person has died. This will get them to back off and give you time as executor of the estate to decide how you’re going to distribute the person’s estate among their different creditors. At this point, all creditors should stop asking for payments and they should also stop taking any money they had been taking from any account of the deceased person in order to pay off their debt.
You should also ask the creditors for a letter or statement which details all of the outstanding debt that the deceased person has with them.
Once you have all of the details, you can start organising how you will distribute the assets and money among the creditors.
You have to distribute them in a certain priority order as I’ve stated earlier in this post.
What Happens when All Debts are Paid Off?
Once you’ve paid off all of the outstanding debt, any money and/or assets that are left can then be distributed to the heirs stated in the will of the deceased person.
What Happens if All Debts Can’t be Paid Off Completely?
If the estate of the deceased person is exhausted and there is not enough money and/or assets left to pay off the debts in full, then an insolvency administration order may be carried out. What this essentially means is bankruptcy for a deceased person’s estate. At this stage, all outstanding debt is written off.
This includes all debts such as priority debts as well as non-priority debts like credit cards.
The process of dealing with debts when someone dies can be extremely complicated depending on the type of debt as well as the situation surrounding the person’s death.
You may be worried about your loved ones getting into trouble with your creditors once you die. While this isn’t what happens in most cases, it can occur rarely.
If you feel your loved ones may become responsible for any of your debts after you die, I suggest contacting a professional for debt advice.
With the right research and by seeking advice from professionals, you can protect your loved ones from debts that you owe. In fact, you may be able to pay off those debts completely within your lifetime.