When a loved one dies, it can be difficult dealing with the aftermath and the practical things that need to be done. One of these is ensuring their financial matters are all in order.
Money is a very personal subject. You can know someone for the best part of a lifetime but have no indication of how they manage their finances until you are tasked with taking responsibility for them. So, what happens if you die with debt?
Debt does not automatically die with a person and will still needs to be repaid.
If a will names you as an executor, you will be granted official permission to handle a person’s estate – the assets and money they have left behind – and pay any outstanding bills and inheritance tax due.
Settling these debts is regarded as more important than distributing the contents of a will to those named as inheritors. In fact, sometimes large assets named in the will such as cars, expensive jewellery or property, may even need to be sold in order to pay outstanding debts.
A person’s estate is the source of money for any debt after death. If the debt level is higher than what the estate can pay back, this is referred to as an ‘insolvent estate’.
The first step in dealing with debt after death is to take stock. Go through all personal paperwork and financial statements and make a list of everything that is owed.
You will need to identify if these debts are:
- Individual e.g. a credit card
- Joint e.g. a mortgage taken out under two names
- Secured – a loan against an item or asset e.g. a mortgage on a house or a loan for a car
- Unsecured – a loan paid by agreed instalments e.g. a home improvement or personal loan. This also includes credit cards, utility bills, unpaid rent, and Council Tax.
Personal bills, such as a credit card, should be paid from the estate, while joint bills should be transferred into a single name e.g.: a cohabitant or surviving spouse.
You’ll also need to ascertain if there is a guarantor for any of these debts. If so, the guarantor will be liable for the debt.
Once you have a copy of the death certificate, it is advisable to contact the various creditors such as banks, credit card companies, utility providers etc. within a month.
Tell them that you’re going through the legal process of dealing with the person’s estate and ask for a letter or statement showing the outstanding balance on the debt.
They should give you a reasonable amount of time to sort out the estate and debts. If it’s an individual debt, they should also stop taking out regular payments from the deceased’s bank account(s) until the debt is settled in full.
The next step is to check if the person took out any insurance to pay off the debt. For example, a life insurance policy to pay off the mortgage in the event of death. You should do this no matter what kind of debt it is.
If you die with debt or are left dealing with debt after death, it can make a sensitive situation even more challenging to navigate.
Tax issues such as inheritance tax, income tax and capital gains tax can further complicate matters with the added pressure of having to deal with HMRC and often complex issues.
What happens in the event of your death is both highly personal and sensitive. Expert will and estate planning advice will ensure your assets are distributed to your chosen beneficiaries in a tax efficient manner.
As independent financial advisers we are always here to help and support. You can contact us on 0345 300 6256 or alternatively you can email us at firstname.lastname@example.org.
Please note that this article is for information only and does not represent personalised advice.
The Financial Conduct Authority does not regulate tax advice.