When someone you love has passed away, the last thing you might be thinking about is debt. However, there are many misconceptions about debt and inheritance, and it is essential to understand your position. Many people believe that when a person dies, the debt dies with them, but that is simply not the case. Similarly, it is a widely held belief that family members are personally responsible for paying debts, but this is not often true. In this article, we take a look at what happens to a person’s debts after they pass away.
If a person passes away with debt, those debts will typically be paid out of their estate. The estate is made up of all of the person’s assets, including their home, cash, business interests, investments, personal items (such as a car and jewellery) and any other property they may own. It is the role of the executor or administrator (the personal representative – PR) to find out what debts have been left behind and work out whether there are enough assets in the estate to cover the debts due. When there is not enough to cover all the debts – an insolvent estate, creditors will be paid out in a certain order until all of the money is gone.
Once the PR has a grant of representation (probate or letters of administration), he can then begin the process of paying off the debts (as well as the funeral costs, any taxes and administration expenses) before any money is distributed from those named to inherit in the will. Legislation sets out which assets should be used first in order to pay debts, if there are insufficient assets to pay all the debts and all the legacies. If there are assets such as a car or valuables, the PR may have to sell these to pay off debts on an estate.
Before the PR pays off any debts from the estate, they are permitted to cover costs of the funeral and any administration of the estate. The order for payment of debts in an insolvent estate is:
• secured creditors (for example, mortgage repayments)
• debts preferred by statute (such as income tax and council tax)
• bankruptcy expenses
• funeral, testamentary and administration expenses
• preferential debts
• ordinary debts (such as credit cards and utility bills)
• deferred debts
Where there is not enough money to cover all of the debts, this hierarchy ensures the most important are paid off first.
BUT beware taking on an estate which is, or may be insolvent – that is, there are insufficient assets to pay all the debts. You may end up being personally responsible if you pay debts in the wrong order or miss paying any that are due. It may be better not to deal with the estate, but instead renounce your executorship or not act as administrator, instead leaving the estate to one of the creditors to deal with. Alternatively, the PR may administer the estate under the directions of the court pursuant to an administration order, or in bankruptcy, pursuant to an insolvency administration order made by the bankruptcy court.
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.
If the deceased borrowed 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.
Members of our Private Client team are on hand to advise on any issues relating to debt and inheritance.. Please telephone 01892 526344 or email firstname.lastname@example.org.
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The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.