Inherited Debt

Inherited debt is any financial obligation passed down to an heir after a bereavement. While beneficiaries are generally not personally liable, the deceased’s estate is responsible for meeting obligations.

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When a close family member, such as a spouse or parent, suddenly dies, worrying about their financial affairs should be the last thing on your mind. But if they had any unpaid debts, it's important to know if you could become responsible for the money owed now that they're not around to make repayments - especially if you're the next person listed on the credit agreement.

Some people automatically assume that, when a person dies, their next of kin automatically becomes responsible for dealing with their secured and unsecured debt and must start making payments to their creditors or debt collectors as soon as possible. However, depending on the situation, the rules around inherited debt can be a little more complicated than this.

Can you inherit debt in the UK?

"Even if you're the executor of their will, you won't be responsible for repaying the debt, only ensuring the debt gets paid from the person's estate."

In the UK, you can't inherit debt from a parent or spouse after they die and won't automatically become liable for any unpaid debts they leave behind. The only way you'll become legally responsible for a debt after a loved one dies is if you're listed on the credit agreement as a co-signer, guarantor, or joint debtor.

For example, if you took out a joint loan or mortgage with your spouse and they unexpectedly passed away before the mortgage was paid off, you'll become solely responsible for all future payments until the total amount borrowed has been repaid.

Even if you're the executor of their will, you won't be responsible for repaying the debt, only ensuring the debt gets paid from the person's estate. This means that the debt can be repaid through the sale of their assets and the money doesn't necessarily have to come from you or your bank account.

Can I still receive inheritance while there's outstanding debt?

Before someone's estate is divided among the beneficiaries of their will, all debts, including funeral costs, must be settled. Even if this is the case, all creditors must still confirm in writing that there are no more payments required because the remaining debt has either been written off or fully repaid.

This is especially true for any high-value belongings you're set to inherit, like jewellery, vehicles, or property. These items must remain part of the estate until the debt has been repaid as they could potentially be sold to recover the debt.

However, if you're the executor of the will and pay the beneficiaries before the outstanding debt has been dealt with, you could become liable for the debt. This could lead to you receiving less than you were originally promised, which can have a knock-on effect on any financial plans you had.

What happens to someone's debts when they die?

"There is a common misconception that credit card debt is automatically written off when you die, but this isn't quite true."

The rules around inherited debt can differ slightly depending on the type of debt owed. Here is a quick guide to different types of debt and what is likely to happen to them when the debtor dies and nobody else is listed on the credit agreement:

Personal loans

For personal loans, what happens depends on whose name the debt was in and whether the debtor had any assets, such as properties, vehicles, investments, or savings. For example, if they didn't have any assets, the creditor will likely agree to write off the debt - this is called having an 'insolvent estate. However, if the debtor left an estate, it will fall on the executor of the will to ensure the debt is repaid.

Mortgage arrears

What happens to mortgage arrears when the debtor dies depends on whether the lender required them to take out a life insurance policy at the same time as the mortgage as this could potentially cover the outstanding debt. However, if there isn't a life insurance policy in place, the property will more than likely have to be sold to make up the money owed as its a secured debt.

Energy bills

The only time energy bills can be inherited is if the account is jointly owned by someone who is still living at the property. Otherwise, arrears must be paid from the debtor's estate or will likely be written off. This type of debt should be treated as a priority as continued non-payment could lead to your gas and electricity supply being disconnected.

Council tax

When the tenant of a rental property dies and they were the sole occupant, the responsibility of council tax usually falls on the owner or leaseholder of the property. However, if the property was solely owned by the debtor, it will be exempt from council tax as long as it remains unoccupied with any arrears paid out of their estate or written off.

Benefits overpayments

Sometimes, a human or administrative error can cause the Department for Work and Pensions (DWP) to make a benefits overpayment or, in other words, pay someone more than their financial situation entitles them to. When this happens and the debtor dies, the money can be recovered from their estate or written off if there isn't enough money to cover the overpayment.

Credit cards

There is a common misconception that credit card debt is automatically written off when you die, but this isn't quite true. When it comes to unsecured debts, such as credit cards, overdrafts, and catalogues, any money still owed by a debtor after they die must be recovered from their estate as long as there is enough money to cover the outstanding debts.

Rent arrears

Like most debts, any rent arrears remaining when a single tenant dies should be paid from their estate. Where there's a joint tenancy agreement in place, the other person living at the property will automatically become liable for the money owed and must treat the debt as a priority to avoid being evicted.

What happens to joint debts when someone dies?

When there's a joint credit agreement and one of the liable parties die, the other party will become solely responsible for making payments going forward. That means they'll need to repay 100% of the debt over time, not just their share.

For example, if you take out a joint mortgage with your spouse and they die, the mortgage lender will expect the surviving spouse (you) that also signed the mortgage agreement to cover the remaining balance. This also means that they will chase you for any missed payments.

Similarly, if you have a joint bank loan with a spouse else and they die, the debt will be transferred so it's in your name only and you'll become liable for the rest of the repayments until the outstanding balance has been repaid.

Can my credit score be affected by a loved ones' debt after they die?

When a loved one dies, it's normal to worry about how their financial affairs could affect your credit score and any financial decisions you make going forward. However, another person's debt should have no impact on you or your credit score unless you had a joint credit agreement with them.

Even if they had large or priority debts, you were married to them, or are the executor of their will, your credit score should remain unchanged and you should be able to manage your finances as normal. This also means you should be able to take out further credit if you need to.

The only situations in which your credit score could be affected by a loved ones' debt is if you're listed on the credit agreement or you fail to make payments as agreed after they die, despite becoming solely responsible for the debt.

What happens if I struggle to pay a joint debt after the other person dies?

When someone dies and you become responsible for repaying a joint debt you took out with them, it's normal to worry about how you're going to be able to afford the repayments alongside everything else - especially if they were the sole breadwinner.

However, there's several ways to manage joint debt in the wake of a loved one passing, and the best solution for you will depend on your personal and financial circumstances. Often, the best thing to do is talk through your options with a financial advisor or debt management company.

Furthermore, if you're struggling to afford the mortgage payments on a home you shared with a deceased partner or spouse, a financial advisor may recommend you use your power as the sole owner to sell or the remortgage the property.

Can a life insurance policy cover someone's debts when they die?

Depending on the circumstances surrounding someone's debts and the specific terms of their life insurance policy, the debt may be covered in the event of their unexpected death. Some companies also provide a 'death in service' benefit, which pays out a lump sum when an employee dies while they're employed by that company.

When the deceased person has a life insurance policy, any money paid out will go to the policy holder's estate, the surviving joint policy holder, a beneficiary that was nominated by the policy holder, or a trust. This money can then be used to pay off any outstanding debts they had when they died, such as a mortgage.

What happens if I inherit a property with a home equity loan?

The rules around inherited debt can get a little complicated when home equity is involved, but the usual expectation is that the loan and interest will be repaid by selling the home and the beneficiaries will receive anything left over from the sale. They can also repay the loan without having to sell the home, if they're financially able to do so.

Most loans - particularly secured debts - can be repaid from the sale of assets, such as a property or vehicle. Because home equity loans are secured to the property, any unpaid debt is also passed on to the estate and the property can be sold to cover the outstanding debt.

However, if the property has negative equity (the debt is more than the home's value) and you're not interested in keeping it, you can choose to disclaim the inheritance and any financial responsibility that comes with it. This also means you'll have to disclaim any other inheritance that was left to you as you can't pick and choose what you want and don't want.

How can I protect myself from debt collectors chasing me for a loved ones debt?

When a family member dies, there's a chance that their debt will be passed on to a debt collector who may start pursuing you for the money owed. However, while debt collectors will be sympathetic of your situation and will be willing to come to an agreement with you, others may resort to bullying or intimidation in an attempt to force you hand over the money owed by any means.

Remember, if you're not listed on the credit agreement for the debt they claim you owe, you're not liable to pay a penny and shouldn't be pressured to pay debts that have nothing to do with you.

Usually, if a debt collector can't recover a debt in the wake of someone's death, the debt will be transferred to the debtor's estate and the responsibility of organising payment will fall on the executor of their will.

Conclusion

When a loved one dies, it's important to know how they left their finances and, more importantly, if there's a chance you could be held responsible for repaying any debts they had.

Despite what some people think, you don't automatically become liable for a partner or spouse's debt once they die and you'll only be expected to deal with it if you're listed on the joint credit agreement, acted as a guarantor, or are the executor of their will.

Most creditors will go straight to a debtor's estate for payment when they die, but the debt will usually be written off if there's not enough assets to repay it.

Key Takeaways

  • In the UK, debt can't be inherited and you won't automatically become liable for any of your loved one's debt after they pass away, including mortgage arrears and medical debt
  • What happens to someone's debt when they die depends on the situation but most debts will be repaid from the debtor's estate or written off if they have no assets
  • Your credit score will remain unaffected by a loved ones debt when they die unless you're also listed on the credit agreement
  • Some life insurance policies will cover the remainder of a debtor's debts once they die, but this isn't always the case
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