Many people think that when someone passes away still owing money on cards, loans or a mortgage, their debts automatically die with them.
But this is not the case.
When someone dies, no one else becomes responsible for their individuals debts, but the debts are recoverable from the estate (the assets or money left behind).
This means that the estate cannot be divided out between beneficiaries until the debts are settled.
What happens if someone dies without leaving a Will?
Go through the paperwork
If you are the executor or personal representative, then you must go through all the paperwork and bank statements of the person who has died, and make a list of all the money that they owe.
It is also important to establish whether these debts were owed solely by the deceased, or jointly with someone else.
Outstanding individual debts
If there are individual debts – money taken out only in their name – you need to contact the bank or lender to tell them about the death.
You should request a letter with details of the outstanding balance.
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Check on payment protection insurance (PPI)
Mere mention of PPI may set the alarm bells ringing, but if there is a policy in place for an unsecured debt, such as a card or loan, it is worth contacting the provider. Some policies include life cover which will pay out in the event of the death of the borrower.
Outstanding joint debts
With a joint debt, two or more people are responsible for the money owed; there might, for example, be two names on the mortgage, or someone may have signed as guarantor.
If debts are “joint and severally liable” or subject to a guarantor, the surviving partner usually becomes wholly liable for the outstanding balance. That said, you will need to check the Ts and Cs to confirm this.
Find out about life insurance
With a joint debt, such as a mortgage, it is important to check if there is life insurance in place. If there is, this is likely to pay off the whole balance.
What can you do if you feel an executor is not performing their role properly?
Contact the lenders
If there is no such cover, you need to contact the bank, mortgage lender or card company to check the terms of the loan. At this point, all bills may need to be transferred into the name of the surviving partner.
If that person thinks they will struggle to meet the debt repayments, they should talk to the lender. It may be possible to suspend the interest for a period. There are also a number of debt charities who can help. These include Stepchange, National Debtline and Citizens Advice.
Dividing the estate
Once the executor has received money from the deceased’s estate as part of the probate work, they should try to clear all of the deceased’s debts.
They can use money from the estate to cover reasonable funeral costs, and then use the remaining funds to first repay secured borrowing, and then unsecured borrowing.
Only then, once these debts have been cleared, can they start to distribute the remaining estate among beneficiaries in accordance with the deceased’s Will.
If debts later come to light after the estate has been distributed, the executor may be liable for these.
What if there isn’t sufficient money to clear the debts?
If there isn’t enough money in the estate to pay off the money that is owed, you may have to sell off assets – including property.
What is probate?
If the value of the assets in the estate amount to less than the debts left by the deceased, this is known as an ‘insolvent estate’.
In this situation, the executor should prioritise secured debts. The next priority is reasonable funeral costs, followed by unsecured debts.
If there isn’t enough money to pay everyone, it is important to seek advice from a probate specialist.
They will advise on which debts take priority – and will also inform the creditors that the estate is insolvent. If the debts are settled incorrectly, the executor will be liable.
Need a helping hand? Find out more about Saga's probate services.