If a parent or family member has died, worrying about money can make an already difficult time a lot harder. This is why it’s really important to understand what will happen about any debts when someone passes away – especially if you’re the ‘executor’ of the person’s Will.
Here, we’ll explore exactly what happens when it comes to dealing with a loved one’s finances and creditors (companies they owe money to) if they have died. We’ll also help you sort the fact from the fiction about whether you can inherit debt from your parents or a deceased person.
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Can you inherit debt from your parents or a loved one? Sorting the facts from the myths
When someone dies, it’s normal to turn to friends, family members and loved ones for support – but however well-meaning their help and advice might be, it’s always good to make sure you’re working with the most up to date and legally correct information about inheriting debt from your parents and general debt advice.
It’s not uncommon to hear a few myths about debts that a deceased person has left behind, such as:
- “When a person dies, all their debt is written off.”
- “When someone dies, their children or family have to pay the debts.”
- “If someone dies with debt, their children’s’ credit scores will go down.”
To be absolutely clear; these are simply not true. So, if anyone’s suggested this could be the case – don’t worry.
What actually happens to debts when you die?
Instead of debts becoming someone else’s, any debts that are left behind when parents or a loved one dies are included in their ‘estate’.
The word ‘estate’ is the legal way of describing everything someone owns. A person’s estate might include any property – like their home – and their possessions (assets). A person’s estate also includes their finances; so this would include money in their bank accounts, any savings or investments, and any outstanding debts that they owed.
Who deals with the estate and any debts?
If the individual died and they had a Will, dealing with the estate and assets becomes the job of the ‘executor’. The executor is the person named in the Will to deal with ‘probate’ – the word used to describe everything that happens legally after someone passes away.
If the individual didn’t have a Will, then the responsibility for dealing with everything is passed to an ‘administrator’ – an individual or group of people a court decides will handle the estate.
Sometimes, being an executor and dealing with a person’s estate is fairly simple – but it can sometimes be extremely complicated. If this is the case, you might want to look at finding a solicitor or probate specialist to help with debt advice, insurance policy processes, and making sure debts are paid to creditors.
Dealing with debt after death
Now we know that debt is considered part of an individual’s estate after their death, and we know who will be dealing with the estate, it’s time to look at what comes next.
The first step for dealing with the finances is to work out exactly what’s owed. This can usually be done by going through the person’s paperwork and bank statements and making a detailed list that includes company names, account numbers, and more.
Do any of the outstanding debts have a guarantor?
The first thing you need to check about any outstanding debt is whether or not there’s a guarantor named on the agreement.
If there is, a guarantor will usually become personally responsible for the amount – and therefore take on the debt if the person the debt relates to has died. If this is the case, the guarantor will need to talk to the company involved to understand where they stand.
How are debts paid off?
There are many different kinds of debt – and how a deceased person’s debts are paid will depend on exactly what kind of debt they have.
We’ll take a look at the most common types of debt – and look at how they should be handled.
Usually, the most complicated debts to deal with are those that are ‘secured’ to something – a house for example.
If there is a property and secured debt involved, you will almost certainly need a solicitor to help you organise the estate and settle the debts. With this legal help, you’ll be able to work out how much of the property was owned and who is responsible for the debt.
In some cases – especially where the deceased was married or in a civil partnership – a secured debt will not be considered part of the estate; instead, it and the property will be passed to the other person in the relationship.
If a debt was just in the name of the individual who is deceased, it will be paid from the estate. So, for example – if they owned a house and it is sold as part of the probate process, the money raised will be used to pay off individual debts.
Even if the individual who has died has a surviving spouse, civil partner or grown-up children, they will not be expected to pay this debt off – unless they were a guarantor.
If a debt was taken out in two or more names – for example, a credit card or overdraft on a joint bank account – then this joint debt will pass in full to the surviving partner. Although joint debts must be paid, you’ll usually find that creditors will be understanding if the repayment terms have to change a little – especially if the situation means the surviving person doesn’t have enough money to pay.
Unsecured debts are things like credit cards, personal loans, payday loans, and overdrafts. These will need to be paid from money in the estate or money that’s raised when assets from the person’s estate are sold. Although these are important things to pay off – they are usually considered less of a priority than secured debts.
Student loan debts
If the individual who has died had any outstanding student loan debt, this will be written off in full by the Student Loans Company (SLC). You will need to provide the SLC with a copy of the person’s death certificate – and they will confirm that the debt is written off afterwards.
What happens if there are debts you don't know about?
It’s perfectly possible that someone could have a debt or debts that there is no paperwork for a record of. Don’t worry though – there are ways of tracking these types of debt down.
Finding debts you didn’t know existed
Many people are very private with their finances – and this can sometimes mean that people owe money that no one else knows about. This can make things a little tricky if they pass away – since their financial business becomes yours to deal with. This type of debt is generally called ‘undisclosed debt’.
Although you don’t have to, it’s often a good idea to place a ‘Deceased Estates Notice’ if you’re dealing with someone estate after their death. This type of notice is published in ‘The Gazette’ – a website and publication that acts as an official public record of many different kinds of information.
Debt companies regularly check this for information relating to people who owe money, so your notice will be picked up by anyone money is owed to and they will come forward and get in touch with you for more information.
It’s very rare that anyone could ever inherit debt – but if you haven’t made an effort to find any undisclosed debt and you deal with the estate without paying something off, you could be taken to court and be forced to pay the debt yourself.
Did the individual have a life insurance policy or other insurance?
When you’re dealing with a person’s estate, you should check to see if the individual had any insurance policies that covered debts and expenses after their death. Sometimes, these policies will be attached to each individual debt – so you should check with each creditor.
Sometimes, a life insurance policy will pay out to a partner or other beneficiary – and if this is the case, it will not become part of the estate to pay off debts.
The individual who benefits from a life insurance payout is not responsible for paying the deceased’s debts or funeral expenses.
If there is insurance in place, you should contact the insurance provider, explain what has happened, and they will support you with the claim.
What comes first?
It can feel overwhelming dealing with someone’s debts at such a difficult time – so it’s useful to know which order you should deal with things in.
Generally, a probate expert or a solicitor will suggest working in the following priority order:
- Let all the person’s creditors know that you’re handling the matter
- Check to see what (if any) life insurance policies, life cover or payment protection plan the individual had
- Work with creditors to begin repaying the debts from the person’s estate – this should start with debts that are secured (like mortgages), then priority debts (like council tax), then debts that are not secured (like utility bills and credit cards)
What if there's not enough to pay everything off?
If there is too much debt for the estate to pay – or there is no estate, this situation becomes known as an ‘insolvent estate’. In this case, the most important debts should be paid off first if possible – and, if there’s no way other individual debts can be paid, you will find that they will almost certainly be written off by creditors.