What happens to a person’s debt after they die?
The estates assets will be used to pay off any debts; Most commonly Liquid assets for example money in bank accounts will be used to repay any outstanding amounts. When there are no liquid assets available it may be necessary to sell the assets in the estate to repay the debts, this includes assets that were left to beneficiaries in the terms of the will.
As an executor it’s important to establish all and any debts connected to the estate. It is the executor’s responsibility to deal with any claims made against the deceased Estate. Any person or company that is owed money can claim against the estate, if a debt has not been properly handled or not paid it can cause series consequences for the executor and beneficiaries down the line.
Establish what debts there are
As an executor, when you are aware that a deceased person had debts you need to start by going through all their paperwork and financial statements and make a list of everything that is owed. If there is more debt than the value of the estate, the estate is called insolvent. In the case of an insolvent estate it is highly advisable you seek professional advice. You can call final duties on 08007318722 if you need further advice in this area.
It is recommended to place a statutory advertisement in the London Gazette to allow any possible creditors or claimants to come forward. Doing this shows that sufficient effort was made to locate any possible creditors before the distribution of the estate. This protects the Executor from being held personally liable if an originally unidentified creditor turns up later on.
Categorize the debts into individual or joint
It is important to know what type of debt there is as they will need to be handled differently.
Individual debt is a debt that is under the person’s sole name; however it is important to check if there is a guarantor as they may be held liable for that debt.
Joint debt is a debt that is taken out in more than one person’s name; it is important to note in this situation that the other person named on the debt has joint responsibility and liability and therefore could end up having to pay the remaining debt on their own.
You should inform the creditors that the person has died and that you are going through the legal process of administering the estate. This allows them to make the necessary arrangements on their side and means that they will not be chasing the deceased for payments. They should stop taking direct debits from the deceased frozen bank accounts and provide statements of the outstanding balance of the debts.
Check for insurance policies
The deceased might have taken out an insurance policy to pay off the debt on their death to protect their loved ones from the fallout of the debts. For example a policy someone may take out an insurance policy to pay off their mortgage to protect their spouse from being left with that debt. There are some policies that are set up to pay out to a specific beneficiary and not paid into the estate.
Paying the debts
You should prioritize the order in which the estate is distributed but debts must paid before any beneficiaries. There order is as follows,
- Inheritance Tax
- Costs incurred while administering the estate (funeral costs, solicitors fees)
- Debts that are against an item or asset (mortgages)
- Other debts such as credit cards, loans, utility bills ect.
In the case of an insolvent Estate solicitor fees will be paid before debts. Using a solicitor in these cases could reduce the amount of stress involved in dealing with creditors while ensuring the estate is administered correctly and the executor is protected from unidentified creditors.
If you are the executor of an estate with debts call a member of our team on 08007318722 or send us an inquiry via our website for a fixed fee probate quote.