Does Debt Die With You?
A guide to paying debts after someone dies, and what happens to an insolvent estate
Photo by Colin Watts on Unsplash
What happens to debt when you die?
When you die, your debt does not die with you. Whenever someone dies, their estate is liable for any unpaid debts. The debt is not inherited by their next-of-kin, but the executor of their Will is under contract to distribute it to the rightful recipients and can be liable for paying a debt if they make an error. If the debt is larger than the value of the estate, the estate can be declared insolvent and nobody else is responsible for paying it, provided it is administered correctly.
If you are writing a Will and worried about passing the responsibility of debt on to your next of kin after your own death, you might want to consider appointing a professional executor in your Will.
Paying off as much debt as you can before you die should make things easier for your loved ones. Everything else depends on the actions of the executor of your estate.
Our guide to administering the estate of someone who has died in debt might help you handle this process, but it can become very complicated and it is a good idea to consult a probate solicitor.
If you are the executor of an estate with substantial debts you might want to consider renouncing the role. You will lose the right to administer the estate if is insolvent.
When are creditors notified of a death?
The executor of the estate must make a reasonable effort to notify potential creditors of the death of their loved one. Placing a death notice in The Gazette, the official newspaper of the British Government, and also in a local paper, would satisfy this requirement.
After the announcement of a death creditors have two months and one day to make any claims on an estate. If there is no death notice, the executor of the estate is usually not liable for any debts if they wait six months before distributing the estate. If there is no death notice and the estate is distributed within 6 months of the grant of probate the executor and beneficiaries can be liable for paying the debt.
It is important to do a thorough search for resources, such as insurance, that can be used to pay debts on an estate before deciding if the debts are payable.
What happens if an estate is unable to pay its debts?
If the executor of an estate discovers that the estate is unable to pay its debts they can apply for it to be declared insolvent, which is similar to bankruptcy.
In England and Wales, they should apply to the court for an Insolvency Administration Order. The estate is passed to a Trustee-in-Bankruptcy who has more powers to claim money that can be used to pay debts.
In Scotland, the executor should apply to the Accountant in Bankruptcy (AiB) for the estate to go through a process called ‘sequestration.’ Anyone who would be legally entitled to act as an executor, such as another close family member, can also apply to the AiB for the estate to be sequestered. A creditor who is owed more than £3,000 from the estate can also apply for sequestration, but they must do so via the courts. A sequestered estate is also handed over to a trustee.
How are debts paid on an insolvent estate?
The Administration of Insolvent Estates Act (1986) specifies an order of payment for debts, to ensure that the money that the estate does have is paid to the highest-priority creditors first. Reasonable funeral expenses are usually exempt from this, and can be paid before the lowest priority debts.
If this process is handled correctly and it becomes clear that the money in the estate, or that can be claimed by it, does not cover all of its debts then the ones that aren’t payable can be written off and no one else is liable to pay it.
If the person who has died in debt gifted a large sum of money to someone who they wanted to inherit their estate before their death this might be interpreted as an attempt to avoid the debt. Creditors might be able to apply to the courts to have the beneficiary pay the money to them.
Who can help pay debts on an estate?
If you do become liable for a debt because of incorrect administration of an estate, or because you are solely responsible for paying bills you previously shared with a loved one who has died, a debt adviser can help you.
A debt advisor can explain your legal obligations, rights and any options you might not have considered before. Make sure that whatever action you take is the most effective option for you and your family, and do not let yourself become pressured into making any decisions by creditors who might mislead you.
There are many free debt advice services in the UK who can help you.
- National Debtline
- Debt Advice Foundation
- StepChange National Debt Charity
- Citizens Advice Bureau
- National Debt Advisors
There are also many bereavement support and grief counselling organisations in the UK that can help you with the emotional distress of losing a loved one during this period. We have a full guide to managing an estate if you need more information on the subject.