What happens to your debt when you die?

Who has to pay your debts when you die?

There are some things you want to leave behind after you pass away, and some things you don’t. Debt is one of the latter. But if a person dies with outstanding debt, for whatever reason, these debts become a liability on their estate. That means they still need to be paid – but how, and by whom? It can depend on the type of debts, and the size of the deceased person’s estate.

Personal or individual debts

Personal or individual debts are credit agreements taken out solely by one person, for example a credit card. When a person dies, they have an estate – the total of their money, property, or possessions. If they die with outstanding personal debts those debts become liabilities on that estate.

Essentially, it’s a technical, legal way of saying those debts have to be paid from the estate before it can be divided between any beneficiaries – that’s people named on the will.

It’s the responsibility of the executor of a deceased person’s will to manage their finances after death – this includes paying off personal debts.

In the absence of a will, the court may appoint someone as the administrator of the estate to manage the finances.

Credit cards

Credit cards are a type of unsecured personal debt. Debt accrued via credit cards isn’t wiped when the person who took out the card(s) dies. This means credit card balances unpaid at the time of a person’s death must be settled by the executor of the will or by an administrator using money or assets left behind in the estate.

Joint debts

Joint debts are credit agreements taken out by more than one person, for example a personal loan or a current account with an overdraft. In most situations, joint debts will pass on to the surviving person(s) who took out the loan. For example, if you and your partner took out a loan together, the debt would be your partner’s responsibility.

Mortgages and other secured debts

A mortgage is a long-term loan taken out to buy a property, secured against that property. If the mortgage was between two people and one of them dies, the repayments are generally made by the surviving person. But whether that mortgage can be considered part of the estate to repay debt depends on whether they were ‘joint tenants’ or ‘tenants in common’.

Joint tenants

Each person has equal rights to the property. If one person dies, their share of the property is passed to the other person. In these cases, the property doesn’t form part of the estate and can’t be used to repay debt.

Tenants in common

Each person owns their own share of the property. When one of the mortgage holders dies, their share becomes part of their estate. The property can therefore be used to pay off any outstanding personal debts.

If the property was owned solely by the person who has died, that property then becomes part of the estate and can be used to pay off their debts.

Are families responsible for debt after you die?

No, debt isn’t inherited in the UK – that means no one else can become responsible for individual debts. Whether that’s a spouse, a civil partner or a relative, they cannot be asked to pay off the individual debts of a deceased person.

However, if the deceased person has named one of those people as the executor of their will, they are responsible for making the payments to debts from their estate. But to clarify, the executor of a will is not personally liable for the debts themselves.

What if there isn’t enough money to pay outstanding debts?

When there’s not enough money in a deceased person’s estate to pay off debts owed, it is known as an ‘insolvent estate’. In this case, the available assets will be used to pay off the most important debts first. Debts are prioritised in this order:

• Secured debts, i.e. mortgage payments or secured loans
• Priority debts, i.e. Council Tax, Income Tax
• Unsecured debt, i.e. credit cards, utilities

Only when those debts are paid, can the estate be divided between beneficiaries named in the deceased person’s will.

How life insurance can secure your assets and your family’s future

Life insurance can help to make it easier for your loved ones to manage your estate after your death. With a valid policy, you can leave behind a cash sum to help pay off outstanding debts and prevent your assets from being sold to raise funds. It can also mean less of your family’s potential inheritance may need to be used to clear debt. You can also place your life insurance in trust, which can help to speed up payments without the need for probate.

Some life insurance policies can be used in inheritance tax planning, speak to an adviser if you need help.

Please note: Each situation is unique, and you may wish to seek your own professional legal and financial advice to make sure your estate is managed in accordance with your wishes in the event of your death.