When someone dies and leaves debt behind who’s responsible for paying them off? And where does the money come from? If you’ve lost a family member and need to deal with their debts, this info will help you get started.
What happens to someone’s debt when they die?
When someone dies with debt it should be paid off by their estate. The estate is everything that the person owned. It could be their home, car, savings and personal belongings.
What if there’s no money in the estate to pay debts?
If there’s not enough money in the estate to pay off all the debt each debt should be paid in priority order until the money runs out. Any remaining debts will usually be written off. And if there’s no money at all then all the debt will usually be written off too.
Who’s responsible for paying the debts off?
The executor of the estate is usually responsible for making sure that the debts are paid. The executor is the person named in the will as responsible for dealing with the estate.
If there’s no will a family member may need to apply for letters of administration. This will make them the administrator of the estate. It means they’re allowed to deal with the person’s estate.
Keep in mind that even if you’re the executor or administrator of the estate that doesn’t mean you have to pay off any of the debts with your own money. You’ll only need to do this if you had a joint debt with the person who passed away. For example, you may have both signed for a mortgage together or have an overdraft on a joint bank account. Things can also get more complicated depending on the type of debt that’s left behind. Let’s look at this in more detail.
Dealing with different types of debt when someone passes away
The type of debt that’s left behind will affect who’s responsible for it and when it should be paid off.
Here are the different types of debt you may come across when dealing with someone’s estate and how they should be dealt with.
Individual debts
This type of debt will only be in the name of the person who passed away. No one else will be named on the loan. All of this debt should be paid out of the person’s estate.
If there isn’t enough money in the estate to pay off individual debt this will usually be written off. A partner or relative of the person who died wouldn’t be responsible for paying off this type of debt unless they put themselves up as a guarantor.
Examples of individual debt includes:
- A personal credit card
- A personal loan
Joint debts
This type of debt will belong to 2 or more people. So if one person passes away then the debt will automatically be passed onto the remaining person or people who are named.
Examples of joint debt include:
- A mortgage that 2 people signed for
- An overdraft on a joint bank account
If, for example, your partner passed away and you’re both named on the mortgage you’ll be responsible for the remaining repayments. When dealing with this type of joint debt it’s always worth contacting the lender to tell them what’s happened. They may be able to help you arrange smaller repayments over a longer period of time to help you deal with the debt on your own.
Secured debts
Secured debt is usually backed by property such as your car or house. This means if you’re unable to repay the debt, the company you borrowed the money from has the property you put up as insurance. When it comes to dealing with debt after a death this can make things more complicated.
Take a mortgage for example:
If you’re joint tenants on your mortgage agreement that means you both own all the property. So if one person dies the surviving partner automatically owns the entire property. And this means that the house does not go to the estate. So the house can’t be used to pay back any debts left behind by the person that passed away. But the surviving partner will be responsible for the mortgage repayments.
If you’re tenants in common on your mortgage that means you each own a share of the house. So if one person dies their share of the house will go to the estate and can be used to pay back debts that they’ve left behind. Unless the person has said that their share of the property should go to their partner in their will.
Figuring out who owned the property and how it’s owned is important when knowing how to deal with debt after death. It will help you understand what will pass to the estate and what exactly can be used to pay off debt that’s left behind.
Unsecured debts
This type of debt is not backed by property. So lenders can’t take any of your property to cover the debt. It could include things like credit cards or unpaid utility bills. Lenders will still try to recover this debt but it’s usually funeral costs and secured debts that are paid off first. Lenders usually have to wait to recover this type of debt until the priority debts are paid off.
Undisclosed debts
Even if you’ve already dealt with the debts of someone who has passed away there’s a chance that you may find other debt later on that you had no idea about. You could be contacted by another lender looking to recover the debt and it could take you by surprise.
To avoid this you can place a notice in a newspaper. This is often called a deceased’s estate notice. This will show that you made every effort to let lenders know what’s happened so they can come forward to recover their money.
It’s a good idea to do this before any money from the person’s estate is given out to family members. That way, you know that there is money left to cover any debt that shows up unexpectedly. And you’re not responsible for paying off the debt yourself.
Dealing with the debts of someone who has died
Now you have a clearer idea of the type of debt you could come across here are the steps you’ll need to take.
1. Contact all lenders to let them know what’s happened
- Get in touch with all the companies that the person owes money to.
- Tell them the person has passed away and you’ll be dealing with their estate.
- Ask them to send you a letter with the amount that’s still owed to them.
- Is it an individual or joint debt? Any direct debits taken from the person’s bank account for individual debt should be stopped until the debt is dealt with in the right order. If it’s joint debt the name of the person who died should be removed from the account.
Contacting lenders as soon as you can means that they won’t be chasing you for the money. This will make things less stressful for you. It will also help you feel more in control of the process especially if you know exactly how much is owed to which companies.
2. Check for an insurance policy
Did the person who passed away have life insurance? Or did they have a death in service benefit at work? Make sure you check this as soon as you can. It will make a big difference when it comes to paying off debt.
- You’ll need to check the policy to see what it covers and if there are specific things that aren’t included. For example, does it cover an unexpected death but not a death caused by a sporting accident?
- Get help from other family members so you know exactly what the policy covers. These types of insurance policies will usually have a named person who will receive the payout. But if they don’t then the payout could form part of the person’s estate and help towards outstanding debt.
- No insurance policy? The person responsible for dealing with the person’s estate will need to wait for probate or grant of administration before paying off the debt. This means that you’ll be allowed to use money from the person’s estate to pay off debt and to share out any remaining money to family members named in the will.
3. Get a grant of probate or letters of administration
This will give you or the person named in the will the permission to deal with the person’s estate. They’re often called the executor of the estate. Once you have probate or letters of administration you can figure out the total amount of the estate. This will help you get a handle on what debts you’ll be able to pay off from the estate. Just keep in mind that you may need to sell some of the personal belongings of the person who died to pay off some of the debt too.
4. Pay debts out of the estate in the right order
This is the order of debts to be paid from the estate:
- Secured debts such as the mortgage
- Funeral costs
- Costs associated with administration of the estate
- High priority unsecured debts such as income tax and council tax
- Other unsecured debts such as personal loans, overdrafts, utility bills and credit card bills
What if there’s not enough money in the estate to pay all the debts?
This is usually called an insolvent estate. All you can do in this case is pay off what you can in the priority order above. Once the money from the estate runs out the remaining debt should be written off.
It’s important to follow the priority order of payments when dealing with the estate. If, for example, you pay a debt owed to the person’s relative before you pay for an outstanding credit card bill you could be made responsible for the credit card bill. So make sure you do all you can to pay off the most important debts first.