IVA Advice Guide – What Happens to your Debts if you died?

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Advice for Debts and Death

IVA.TV have reproduced the Crown Copyright Guide on Debts and Death. People often ask 'Do your debts die with you?'This isn't always the case and can lead to financial hardship for the surviving spouse by swallowing up assets you thought you'd inherit.

Guide on Debts and Death:

What happens to your debts when you die?

How different debts are paid off when someone dies, the possible effect on a jointly owned home and where to get advice.

When someone dies, any debts they leave are paid out of their ‘estate’ (the money and property they leave behind). You’re only responsible for their debts if you had a joint loan or agreement or provided a loan guarantee – you aren’t automatically responsible for a husband’s, wife’s or civil partner’s debts.

The estate

A person’s estate is made up of their cash (including from insurance) and investments, property and possessions.

After someone dies their estate is handled by one or more ‘executors’ – or an ‘administrator’ if there wasn’t any will. These are usually a relative or friend and/or a solicitor.

If the estate’s worth above a certain amount the executor or administrator will need special permission – called ‘probate’ or ‘letters of administration’ – to be able deal with the person’s affairs. This includes paying off their debts.

What happens if there’s not enough money to pay off all debts?

In this case, the estate has to pay off any outstanding debts in a set priority order before anything is given to people named in the will, or until the money runs out.

When someone dies, their debts don’t die with them. They have to be paid out of the person’s estate.

If you are administering an estate, you must make sure you have paid all the debts before you pay the beneficiaries. If you are not sure what the debts are, you need to advertise in the London Gazette and a local paper for two months for anyone who may have a claim on the estate, and then wait two months before paying the beneficiaries.

The London Gazette is a weekly government publication that contains various legal notices. You could become liable (responsible) for the debts if you pay the beneficiaries without having cleared all the debts first. You may also have to submit a tax return for the person who has died.

If there is not enough money to pay all the debts, they must be paid in a particular order:

• 1. the funeral expenses and ‘testamentary’ expenses (those to do with dealing with the will);
• 2. any dent secured by a mortgage on a property;
• 3. HM Revenue and Customs;
• 4. the Department of Work and Pensions, who deal with social security (you may have to refund any over-payment of benefits);
• 5. unpaid pension contributions or wages.

If all the debts can be paid, but there isn’t enough money left to pay everything set out in the will, the legacies (those where a specific amount is mentioned) will be paid first, and the other people mentioned will get what is left over.

If there is not enough to pay all the legacies, the people entitled to the legacies will get a proportion of what they have been left, depending on how much money is available.

The other people mentioned in the will who are supposed to get the remainder will get nothing.

Debts if you owned a home together

If you jointly owned your home and there’s not enough money elsewhere in the estate to pay off the deceased person’s debts, there is a chance that your home would have to be sold. Your options to avoid a sale depend on whether you owned it as ‘tenants in common’ or ‘joint tenants’.

‘Tenants in common’

In this case each of you owned a stated share of the property. The share belonging to the person who has died becomes part of their estate and goes to whoever is mentioned in their will. But if there are outstanding debts these must be paid first from that share. To avoid a sale of the home you and/or anyone due to inherit the second share will need to try and negotiate with those owed money (‘creditors’) and find the necessary money.

‘Joint tenants’

In this case you owned the whole property together and the deceased person’s share passes automatically to you.

But even though it’s now in your estate, you can’t ignore the debts. Creditors can apply for an ‘Insolvency Administration Order’ within five years of the death. This can have the effect of dividing the property in two and force a sale. So it’s in your interest to try to come to an agreement with people who are owed money, and try to pay them yourself.

You can check whether you owned as tenants in common or joint tenants with the Land Registry for a £2 charge.

How different debts are paid off

Mortgages

If the mortgage lender required life insurance this may pay off the full amount of the loan. If there isn’t any insurance – or if there were second mortgages not covered by insurance – the property may have to be sold.

Rent arrears

If you’re a joint tenant in rented property you must pay off any rent arrears.

Water rates

Anyone still living in the house is responsible for any arrears and for ongoing charges, even if their name isn’t on the bill.

Council Tax

Anyone still living in the house is responsible for any arrears and ongoing charges, even if their name isn’t on the bill. (But there’s a 25 per cent reduction for being the only adult in the house.) Council Tax stops if no one’s living in the house.

Fuel bills

If you’ve been living in the property jointly you may be liable for fuel bill arrears.

Hire purchase (HP agreements)

The buyer doesn’t own the property until the last payment has been made. But if over one third of the agreement has been paid, the seller needs a court order to get the goods back.

Before returning goods or making payments, check to see if there was a payment protection plan.

Personal loans, credit cards and credit debt

Repayment of these debts must wait until others have been settled. If cards are held jointly, any debts will be the joint holder’s responsibility – but check to see if you’re covered by a payment protection plan.

Tax debts and overpaid benefits

Any tax owed or overpaid benefits or pension would be paid out of the estate. To prevent benefits overpayments and check if tax is owed contact the relevant office as soon as possible. You’ll find contact details on relevant paperwork, or you can search online.

Checking for insurance to cover debts

Always check carefully to see if the deceased person’s debts are covered by:

• death cover for a mortgage
• payment protection cover for personal loans or credit cards
• ‘death in service’ from a pension (payment of a lump sum if the person dies before pension age)

For further advice please contact IVA.tv.

Information in the above IVA Advice Guides and Debt Advice Guides includes extracts from Crown Copyright Advice Guides Direct Gov Uk