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What Happens to Your Debt When You Die if You Have No Estate

Written by, Marija Petkova

Updated April, 17, 2022

When a person passes away in the UK, any outstanding debt they might have is paid for by their estate (assets and savings in the name of the deceased). 

But what happens to your debt when you die if you have no estate? 

In this blog post, we will discuss what happens to your debt when there is not enough money in your estate to cover it. We will also provide some tips on how to ensure that your loved ones are not burdened with your debt after you pass away. 

What Happens to Your Debt When You Die if You Have No Estate?

Sadly debt is a part of most adults’ lives. In 2020 the average total debt per household comprised around ​​108% of average earnings, making it highly likely that a person has not completely paid off their debts before the unthinkable happens. 

If you die with a large debt, the assets and money in your estate will be used to pay off the debt

If there is no money in the estate to pay the debts of the deceased, they will likely be written off completely. In other words, the debt dies with you.

The only exception is if the debt was in joint names, such as joint loans or credit agreements. Then, the surviving borrower inherits the debt. 

If there are more debts than money in the estate, the estate is considered insolvent. 

What Happens to Your Debt When You Die in the UK?

As mentioned above when someone passes away in the UK, their outstanding debts are covered by their estate, i.e. money, savings, investments, property and possessions.

 If there is a will, the executor of the estate will be responsible for paying off any outstanding debt. If there is no will, then the administrator will use the money and assets in the estate to repay debts. These roles are usually taken on by a close friend or family member or a solicitor. 

Before the executor starts using the assets and money in the estate to settle debts, they should go through a process called probate or grant of administration. This will show that they are able to manage the estate on behalf of the deceased person. 

After that, the executor can start paying off debts until the assets are used up or the debt is repaid. Paying the debts is not the financial responsibility of the executor or administrator. 

Debts are paid in the following order:

  • Mortgage repayments and other types of secured debt
  • Priority debts, including Income and Council Tax
  • Utility bills, rent arrears and fuel bills
  • Credit cards, personal loan and other types of unsecured debt

Once the debt is paid, the remaining estate is divided among the heirs or beneficiaries. 

Am I responsible for my spouse’s debt after death?

If your spouse, civil partner, or next of kin passes away, you are only responsible for the debts of the deceased if you have a joint loan or have provided a loan guarantee. Otherwise, you are not liable for settling debts. 

What Happens to Mortgage Debts After Death With No Estate?

If the deceased was a sole mortgage borrower, the outstanding mortgage payments will be covered by the estate after which the property can pass on to the beneficiary named in the will.

If there is not enough money to repay the mortgage, the property will be sold to repay the outstanding debt. 

The same applies if you jointly owned property with a partner who dies with a significant amount of debt. 

There are two scenarios in this case: 

  • If you own the property as joint tenants, the deceased’s share of the property passes to you, complete with outstanding mortgage payments. If you can’t make payments, then the property could be divided and a sale could be forced. This makes it in your best interest to come to an agreement with the creditors and repay the mortgage yourself. 
  • If you were tenants in common, the deceased’s share is inherited by the beneficiary named in the will. That person could pay off the mortgage to avoid a sale. 

What About Other Kinds of Debts After Death With No Estate in the UK? 

Typically, any outstanding debt you have will be paid off by the estate. Unsecured debt like credit card and personal loan debt is the last type of debt to be paid off.

What happens to credit card debt when someone dies?

If the credit cards were held in the deceased person’s name only, they form part of that person’s estate. If the deceased person was not able to make credit card payments, the remaining debt will be paid off from the estate.

If the assets of the estate are exhausted, credit card debt after death will be written off.

What happens to personal loan debt?

Should the personal loan be in the deceased person’s name only, debts will be covered by the estate. In most cases, though, if a person needed a loan then it is highly likely they had no money in their estate to begin with. In this scenario, creditors will write off the debt. 

However, if you had a joint personal loan with the deceased, you have the responsibility to pay off the entire debt. If you have acted as a guarantor for the deceased person’s loan, you will be charged with repaying the outstanding amount if there is no money in the estate. Keep in mind that 59% of Brits have taken out a personal loan between £5.000 and £20.000, so you might end up with a hefty sum to pay off.

What about student loan debt?

If a person has no money in the estate to pay student loan debts, the debt will be written off. A family member or friend should notify the Student Loans Company (SLC) and provide a copy of the death certificate so that the remaining sum can be written off. 

Undisclosed debts

The executor of an estate might find a debt they weren’t aware of when all other debts are paid. This situation can be avoided by publishing a notice in a local newspaper before beginning to settle the debts, giving the deceased person’s creditors at least two months to make any claims if they so desire.

You are not required by law to publish a Deceased Estates Notice; however, if you do not, you run the danger of being held personally responsible if a creditor comes forward after the estate is distributed. In this case, you might even be required to pay the debt yourself. 

What Can You Do to Ensure Your Loved One Will Not Be Burdened by Your Debt When You Pass Away?

One of the best ways to make sure your family is protected financially after your death is to buy a life insurance policy. Currently, only one in three adults in the UK have life insurance, meaning that 60% of people are not covered by a policy. 

If you have life insurance, the payout will be added to your estate and used to settle any debt after your death. 

You could also opt to write your policy in trust, thus detaching it from the estate. This means that your loved ones can use the money after you die. In other words, it won’t be used to pay off any outstanding debts after you pass away. It could also help you reduce your inheritance tax

Dying With Debt and No Assets: How to Deal With the Debts of Someone Who Has Died?

It is not an easy task, but dealing with the deceased person’s debts should be done sooner rather than later. 

Here are a few pieces of advice to help you manage the process. 

Get in touch with creditors 

Inform creditors that the debtor has died as soon as possible. Letting them know that you are in the process of dealing with the deceased’s estate will show creditors that their money will be paid back and also give you the time you need to sort through the deceased person’s affairs.

You should also ask creditors for a letter or some kind of statement showing the outstanding amount owed on the debt, in case there are any undisclosed debts that you do not know about. 

Consult a debt advisor 

Managing your payments and dealing with the debt of someone who has died on top of the loss of a close friend, partner or relative can be overwhelming. That’s why talking to a debt advisor will help you. 

An expert will tell you about ways to settle your debt that you may not know about as well as check if you have applied for all possible benefits and entitlements. They will also help with money management even if you think there is no money in the estate to cover the debts of the deceased person. 

Bottom Line

It is very hard to cope with the death of a loved one, but it is important to settle their affairs as soon as you are able. This includes debts and other liabilities which have to be resolved before the estate can pass on to the beneficiaries. Luckily, there are plenty of debt advisors available who can help you manage the money and assets in the estate and ensure that all debts have been repaid.

                           

Frequently Asked Questions And Their Answers

Does debt die with you?

No, debt does not die with you. Any outstanding debts left after you die will be covered by the estate. An executor or administrator will be responsible for selling assets in your estate and paying off your debts. 

How long do creditors have to collect a debt from an estate in the UK?

Creditors have six years to bring a claim for unpaid debts, although a personal representative will not want to wait that long before distributing the estate. Even if the personal representative was unaware of the outstanding debt or responsibility at the time of distribution of the estate, it does not release him from liability. Often the executor or administrator will be required to pay undisclosed debts out of pocket. 

Can you inherit debt in the UK?

No, debt in the UK is not inherited. The two exceptions are:

  • You have a joint loan, such as a mortgage or personal loan. Then, the outstanding debt will be inherited by the surviving person. 
  • You have provided a guarantee for a loan. If the borrower dies, then the guarantor of the loan is responsible for paying off the money borrowed. 

Are beneficiaries responsible for debts left by the deceased?

No, beneficiaries are not required to pay off the debt of the deceased person. However, the share of the estate they receive will be affected by the debts of the deceased. 

So if you are named as a beneficiary in someone’s will and that person has debts, the inheritance you receive will be reduced.

If you are named beneficiary in a will of a person who has no estate (or the money has run out) you will not inherit anything. But as mentioned above in the ‘what happens to your debt when you die if you have no estate’ section, the debts will be written off and you will not be responsible for settling them.