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Debts after a Death

What happens to someone’s debts after death?

Understanding what happens to any debt someone leaves after their death is essential. If the person managing the estate (the personal representative/s, i.e. the executor/s or administrator/s) fails to understand the different types of debts and what happens to them, leaving them at risk could mean the person managing the estate (the personal representative/s, i.e. the executor/s or administrator/s) risks of personally inheriting the debt and becoming responsible for paying off all debts of the deceased person. They risk personally inheriting the debt.

It is a commonly held misconception that debts die with the deceased person. This is not the case. There is a clear, strict order of priority of payment of debts, and the debts must be paid before any money is paid out to any beneficiary. If this order is followed, then there is no personal liability on the person/s administering the deceased person’s estate.

In many cases, any debts are quite small in relation to the estate’s value and will present no difficulty to the personal representative. However, if there are many debts, some are secured (e.g. a mortgage on a property). It seems possible that there may not be enough money in the estate to pay all the debts, i.e. the estate may be insolvent. The personal representative should proceed with extreme care before doing any work on the estate at all. Please read all of this section before considering the options that are explained below. It is especially important to be aware that if a family member pays for the funeral with their own money, it may be difficult to recover this money from an insolvent estate.

Who is responsible for paying debts?

Where there are joint debts, these will likely pass to the surviving co-debtor/s, who will become fully responsible for the debt moving forward. Examples include a joint mortgage or an overdraft on a joint bank account.

While this will not generally be of any concern for the personal representative who is managing the estate, it may be of considerable concern to the joint owner of the debt, who may not be able to pay the larger amounts owed as an individual, depending on their personal circumstances. In some cases, the personal representative and the co-owner of the debt will be the same person. If this applies to you, you must carefully keep the paperwork separate for the two things. Do speak with the loan or mortgage provider as soon as possible if you are worried about being able to make the necessary payments. It may be possible to re-negotiate the loan/mortgage. Read the terms and conditions carefully. However, the exact nature of any joint debt must be clarified, and the paperwork must be fully understood.

It is the job of the personal representative/s to make sure they pay all the debts they can out of the deceased person’s estate using the deceased’s assets.

They are not liable to pay off all debts where there is not enough money or assets in the estate to cover them. However, they must pay off debts in a strict order of priority to prevent them from being personally responsible for paying off any or all other debts with their own money.

One of the first jobs of the personal representative is to find out about all the debts of the person who has died, as well as the value of all assets as of the date of death.

This confirms if there is sufficient money or assets to pay any or all of the debts due and distribute the estate according to the Will or Intestacy or whether there is no estate for them to distribute.

If the person has died with limited assets, they might be insolvent, leaving it unable to pay the debts either in full or in part.

In what order of priority must debts be paid?

This is the order of priority for paying off personal debts:

  1. Secured debts. Examples of secured debt are a mortgage on a property or a loan for the purchase of a car. Creditors will try to recover what they are owed by selling the asset. If the sale of the asset doesn’t cover the entire debt, then the debt will fall under the ‘unsecured debt’ category.
  2. Funeral expenses. Funeral expenses must be reasonable and proportionate to the size of the estate taking into account likely debts. For example, you can’t spend £6000 of a £7000 estate on the funeral if there are debts of several thousands of pounds. A gravestone or other permanent memorial is not considered to be part of the funeral expenses. Family members who pay for a funeral with their own money may find it difficult to recover the money later if there are other creditors.
  3. Testamentary expenses. These are the expenses incurred as part of the administration of an estate. Careful records of these should be kept along with any receipts for petrol or train journeys, postage etc.
  4. Preferential debts (also called ‘preferred debts’). These are debts that must be paid before other unsecured debts. Wages due to employees are classed as preferential debts. It is very rare for an estate to have preferential debts.
  5. Unsecured debts. This includes debts to the local and central government, utility bills, bank loans, credit, and store card debts.
  6. Interest is due on unsecured loans.
  7. Deferred debts. These are the least important debts and they do not have to be paid until all other debts have been fully paid. Informal loans between family members fall under this category.

What if there is no estate or inheritance to pay off the debts?

The highest-ranking debts must be paid in full first, only moving down to the next class of debt once all of the individual debts within that higher class have been paid off in full.

The only exception is when an individual creditor has agreed to write off the debt within that class. If there is not enough money to pay off the entire class of debts, then they must be paid off pro rata with the amount of money that is available within the estate.

Payment of a lower class of debt indicates there is enough money to pay any higher-ranking debt and will leave the personal representative/s personally liable for paying off those other debts in full.

No payments to beneficiaries should be made until all the debts have been paid in full or written off.

How can Personal Representatives protect themselves?

How can Personal Representatives protect themselves?

The personal representative must write to each known creditor as well as possible creditors to find out the extent of the debts and whether or not they will enforce them. Sometimes creditors will simply write off debts, but you can never assume they will. However, it is vital to also find out about unknown creditors and claimants against the estate for the personal protection of the personal representatives.

To fully protect their personal position, the personal representative should advertise any unknown outstanding debts in both the London Gazette and also the locality where the person used to live and wherever he or she owned any property. This can be done immediately after the death if executors are appointed and acting under a valid Will, but only after the issue of the Grant if there is no valid Will and administrators are acting.

Only once the time limit required to advertise has expired and all reasonable attempts made to find out about all debts, will the personal representative be free to work out what sort of debts are due and the total amount owing.

Great care needs to be taken NOT to pay off bills and debts too early as there is a strict order as to payment of debts as each is classified into a different priority. Further, unless the value of all assets is known, then the personal representative cannot work out if there is enough to pay any or all of the debts due.

What if there is no estate or inheritance to pay off the debts?

As already outlined, the highest-ranking debts must be paid in full first, only moving down to the next class of debt once all of the individual debts within that higher class have been paid off in full.

The only exception is when an individual creditor has agreed to write off the debt within that class.
If there is not enough money to pay off the entire class of debts, then they must be paid off pro rata with the amount of money that is available within the estate.

Payment of a lower class of debt indicates there is enough money to pay any higher-ranking debt and will leave the personal repsentaitve/s personally liable for paying off those other debts in full.

No payments to beneficiaries should be made until all the debts have been paid in full or written off.

Should I use a solicitor?

The priority for the personal representative is to pay off any secured debts, such as a mortgage or secured loan. Next, reasonable costs for a funeral are considered a priority debt. Care needs to be taken when arranging a funeral where funds are tight to make sure these are considered reasonable given the size of the estate.

Provided these debts can be paid off in full, then, where there is a suspicion that the estate might be insolvent, it is certainly worth seeking legal advice as soon as possible. The costs of taking such advice constitute a priority debt to the estate and should be paid out of estate money assuming there is enough money to pay this.

Due to the complexity and risks involved, a personal representative is likely to want to seek professional advice to protect their own position. A suitably qualified professional with STEP qualifications, carrying TEP after their name would indicate that person has experience in handling many different estates including insolvent ones.

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