What happens to debt after someone dies?

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Naturally, dealing with the estate of a loved one is often an emotional and challenging experience. However, if debt is linked to the estate, the situation can be that much harder to deal with. There are many misconceptions about debt and inheritance, and it’s essential to understand your position.

Any debt that exists must be dealt with as part of the estate administration process. However, it’s not always the case that relatives of the person who has left the debt are held personally responsible for repaying them.

What happens when there are debts on an estate?

Debts will typically be paid out of the deceased’s estate. The estate comprises all of their assets, including their home, cash, business interests, investments and any other property they may own. It’s the duty of the executor or administrator to find out what debts have been left and determine whether there are enough assets in the estate to cover them. If there are debts then it could mean that beneficiaries receive less than what they may have been entitled to, or even nothing, if there are insufficient assets to pay the debts.  When there are insufficient funds to cover all the debts, creditors will be paid out in a certain order until all of the money is used up.

If there are debts in an estate, it is important to take legal advice as early as possible and before any debts are paid off (even in part), as doing so may have unintended consequences.

What is the order of priority for debts on an estate?

Before the executor or administrator pays off any debts from the estate, they are permitted to cover costs of the funeral and any administration of the estate. Once they have a grant of probate or letters of administration, they can then begin the process of paying off the debts before any money is distributed from those named  as beneficiaries in the Will or under the rules of intestacy, if there was no Will. The order in which debts must be paid is as follows:

  • Secured debts (for example, mortgage repayments)
  • Priority debts (such as income tax and council tax)
  • Unsecured debts (such as credit cards and utility bills)

If there are assets such as a car or valuables, the executor may need to sell these to pay off debts in an estate.

What happens if a debt is held in joint names?

Where a debt is held in joint names, such as a mortgage, the surviving party who is named on the lending documentation will take on liability for the full outstanding amount.

Can debt pass to a spouse or civil partner?

If the deceased borrowed money in their name only, the debt will not pass to a spouse, civil partner or any other person, unless they have provided a guarantee on the loan.