Losing a loved one is painful under any circumstances, but it can become even more stressful when the deceased person has debts, which can leave family members worried that the debt will become theirs.
In this guide we’ll examine inherited debt, exploring whether you can really inherit debt, what happens to a deceased person’s estate, and what to do if a loved one is carrying debts when they die.
Can you avoid inheriting debt?
It’s not possible to inherit debt from a deceased person, unless you co-signed a joint debt. In that case, you will become responsible for 100% of repayment.No, you can’t ‘inherit’ a loved one’s debts if a parent or guardian dies. Debts are not passed down between generations of family members, and under UK debt collection laws, debt collectors can only pursue named debtors (i.e. the deceased).
When a person dies, any money they owe to creditors is taken from their ‘estate’. An estate is the sum total of a person’s belongings, including assets like a house or car, savings, pensions, and so on.
That means if your loved one owed money when they die, you wouldn’t be responsible for paying it. That said, if you are the executor of their will, it may well be you who has to deal with the deceased person’s debts.
Although you generally won’t be asked to pay debts belonging to another person when they die, there are certain debts that won’t automatically be paid off after the death of a loved one.
While individual debts will usually be paid by the estate or written off when a person dies, this is not the same for joint debt. Joint debt is any debt you take out with another person, like a joint bank account or a mortgage on a family home.
If you’re paying up a joint debt with someone who then dies, then under the principle of joint and several liability, you will become responsible for the repayment of the total debt in the eyes of the creditor.
Home equity loans are secured debts; a person will offer their home as security against the loan, which gives them more chance of being accepted.
Because home equity loans essentially attach debt to a property, if you then inherit a home with a home equity loan against it, that debt will become yours. It is possible for you to keep the home, but first you’ll need to pay off the debt inherited from the deceased.
As long as your loved one’s estate holds enough money to repay their debts when they die, the rest of the estate will fall to you and your family.
Similar to a will, a living trust is a legal document which outlines what the deceased would like to do with the money in their estate, including life insurance, retirement accounts, and property. If the deceased’s creditors seek repayment, money in the trust will be used to pay off debts.
Provided it’s a valid claim, the executor of the will (which may be you, a surviving spouse, or a solicitor) will distribute money to the beneficiaries named in the will or living trust – but only after all unsecured debts and other liabilities have been settled.
Most retirement accounts and pensions will pay out somewhere between two and four times the final salary of the deceased in the form of a lump sum. In the UK, this money will be tax free if the deceased was under the age of 75 when they died.
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If you’re the executor of a will, you’re not personally liable for any money owed when your loved one died, but you may be expected to make arrangements to repay debts via their estate.
If you find yourself in this position, your first move should be to get in touch with a solicitor. Beyond that, here are some useful next steps.
One of your first acts as executor of a will should be to let your loved one’s creditors know that they have died. Creditors deal with the death of a debtor in various ways – some might continue to seek repayment, while others will write the debt off.
If you don’t inform the creditor, however, they’re guaranteed to continue chasing you. One of the easiest ways to let them know is to place a deceased estates notice – an advert placed in a newspaper which informs creditors of the event and gives them a fixed window in which they can make a claim against the estate.
Once you’ve informed creditors of the death and given them a chance to submit a claim, it’s time to go through the deceased person’s estate and work out whether they have enough money to pay off any outstanding debts.
If the deceased is covered by a policy, read it closely. Policies like payment protection insurance (PPI) usually only cover short-term illness, whereas a life insurance policy may be enough to cover outstanding debts, while the rest will go to any named beneficiaries.
As executor, you will be expected to make arrangements for any remaining debt or leftover credit agreement not covered by a policy.
Make sure you deal with secured debts first, like mortgages secured against a home – they’re subject to the strictest debt collection laws. Next, priority debts like income tax and council tax arrears.
Finally, pay off any remaining unsecured debts. These include credit card debt, personal loans, and unpaid utility bills.
Your credit score can only be impacted by the debts of a deceased person if you shared joint debts with them.
No. You can’t inherit a debt from a loved one unless you’re a named signatory to the original agreement, so your credit rating won’t be affected.
If you’re the executor of the will of a person who died with debt, you may be expected to make arrangements to repay certain debts, but even then your credit score shouldn’t be impacted.
Your credit score can only be impacted by the debts of a deceased person if you shared joint debts with them.
If you share a mortgage with your spouse and they pass away, you will become solely responsible for payment. Failure to do so will have a negative impact on your credit rating, and you may struggle to access credit in the future.
The death of family members is never easy, but things become even harder when money comes up for discussion. That’s why it’s important to get professional advice if you’re worried about a loved one’s debts.
At Your Debt Expert, we help tens of thousands of people every year to put their debt problems behind them. Our debt advisers will be happy to discuss inherited debt, offer you financial advice, or even help you deal with money problems of your own.
For financial advice that will give you peace of mind, get in touch with Your Debt Expert today on 0800 082 8086.
Advice and support is also available at Money Helper.
*A debt write off amount of between 25% and 75% is realistic, however, the debt write off amount for each customer differs depending on their individual financial circumstances and is subject to the approval of their creditors. The example provided has been achieved by 10% of our IVA customers in the last 12 months.
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