Dying in debt is a complicated matter, but it’s something that happens every day. Many people die without repaying their debts, which means that there are systems in place for every possible scenario. To understand what happens to your debt when you die, it helps to know about your estate and how this will be handled after death.
Your debts can only be passed onto your next of kin if you own that debt with them - such as a joint mortgage. Your other debts are your own, and will be repaid from your estate or otherwise written off.
When you die, your debts don’t die with you straight away. They become liabilities that need to be paid back using your personal estate. If that can’t happen, they won’t be passed to your next of kin.
Debt won’t pass on to your next of kin, though if they’re named as your will executor, then they’ll have a lot to do when you die.
Read on to learn more about debt when you die, and who becomes responsible for it.
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Your estate is very important if you’re in debt when you die. The value of your estate dictates how your remaining debts will be dealt with.
Your estate is made up of your assets, from the property you own to any savings you’ve got tucked away in bank accounts. If you have a life insurance policy, this might also payout to your estate. Everything’s wrapped up together, from the car on your driveway to antique vases that have passed down through several generations.
Your estate might include a house. It will also include any money that’s being kept in your name when you die.
After death, your debts become liabilities of your estate. They’re not wiped instantly, though many people believe that their debts will die with them. Instead, think of your debts as dying slowly if you can’t pay them back.
If your estate covers all your debts, they’ll be repaid in full. If you only have enough to make partial payments, your debts get paid back in priority order. Secured debts are higher priorities than any unsecured loans and credit cards. If your estate is very small, or you have nothing left at all, your debts will be written off completely.
Your estate is used to pay back your debts until all the money runs out. If there are any debts left over when your estate’s dried up, these will be written off by your creditors.
Repaying debts won’t happen automatically. In most cases, it’s your will executor that has the task of managing your debt. They’ll have to contact creditors and explain the situation.
Your will executor might start to be chased for debt repayment. They won’t become financially liable themselves but may be treated as though they are until your estate has been settled.
Your executor must use your estate to pay back any money that you owed. Debts should be repaid in priority order, with unsecured loans and minor debts last. Once there’s nothing left, remaining debts must be wiped clear.
Managing someone’s estate can be a very big task, especially with the property involved. Your executor might need to sell your house to clear any outstanding debts. Dealing with someone’s estate can take several years, and this might be a job that falls to your next of kin.
No doubt you have things that you’d love to give to your next of kin. Perhaps you’ve always dreamed of your firstborn child taking that vintage car you’ve restored. Maybe you want your spouse to keep the house or want to give a cash gift to your grandchild. Many people have plans to pass on an inheritance to loved ones that they leave behind.
Nobody gets anything from your estate until your debts have been properly dealt with. Debts are first priority, so they’ll need to be paid back before your loved ones get anything they’re due. If your debts are so high that your estate runs out of funds, there’s nothing left to be used as an inheritance.
Once your debts have been repaid, anything that’s left will be passed on to named beneficiaries. If you’d planned for certain items to be given to certain people, they might have already been sold to pay back what you owed.
You may have joint debts with your next of kin, and these will be handled slightly differently. Whilst your own debts won’t be passed on, the joint debts are a different matter. Joint debts are just as much your next of kin’s as they were yours, so the responsibility for paying joint debts falls to the other named party. If you shared joint debts with your next of kin, they’d become financially liable.
If you shared a mortgage or had joint ownership of property, things can become complicated. Your next of kin remains entirely responsible for a joint mortgage. What happens to the property will depend on the way you owned it as a couple. If you were ‘joint tenants’, you both owned the house with responsibility split 50/50.
If you were ‘tenants in common’ you each owned a separate share, and yours may be sold to pay back your debts whilst your next of kin’s kicked out of their home.
If you owned a house with someone as ‘tenants in common’, they could choose to buy out your share. This will give them full ownership of the property you shared so that they can continue to live in their home without any further disruption.
|Total Debt (avg)||£4960||£8750||£8250||£5870||£5080||£3370||£1580||£540|
These figures include Student Loans Company debt – which inflates the numbers for 18-24 and 25-34 age groups significantly.
Once you reach 65, your likelihood of having a large volume of debt is reduced. However, these are averages, and so your debt levels could be higher depending on how you’ve managed your finances. Consider now what you could do to help clear your debts so that your next of kin can enjoy the full value of your estate without debts having to be cleared from it first.
To make your death easier on your next of kin, you should keep the financial things in order. It’s hard enough to grieve, without managing debts and concerns about losing your home. A life insurance policy could help your next of kin, by boosting your estate when you die.
Some life insurance policies will pay out directly to your estate. This money can be used like the rest of your estate, to pay back any debts that you’ve died with. Some policies, instead, are paid directly to your next of kin or a named beneficiary. Check the terms of your life insurance policy to see who gets the money when you die.
Many couples choose to keep a folder full of details about bills, debts and life insurance policies. Having everything in one place can reduce the admin that a loved one will face when you die.
Financial responsibility for your debt can’t be passed on to your next of kin, but this doesn’t mean that they won’t have to be involved with your creditors and lenders. If they’re the named executor, they could spend several months trying to keep creditors at bay.
Here at Money Savings Advice, we have partnered with some of the UK’s financial brokers. They have already helped thousands of people reduce and remove a high percentage of debt, get the best life insurance deals and get Wills in place to protect their families and estate, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers, then click on the below and answer the very simple questions.
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