What happens to personal debt after death?

15 June 2018

Sometimes we get asked by clients what will happen to their debts if they pass away, and whether it will impact their family members. It depends entirely on case to case of course, but here is a brief outline of what people may expect.

But the idea that personal debts ‘die with us’ is only partly true – creditors can still recover their money from bank accounts, savings and the sale of any assets (like property or a car). Even though family members are not personally liable for an individual’s finances, if they die with substantial arrears their family may not receive the nest egg they would like to expect.

What people often don’t realise is that, when it comes to settling an estate, creditors always come ahead of anyone else named in a will, or someone who would automatically inherit money if an individual doesn’t have one, such as children or siblings.

Depending on how much is owed, family members may receive nothing from an individual’s estate after the debts have been settled. It is only when someone dies without owning a property or possessions of any value, or what is left amounts to less than they owe, that personal debts are finally written off. Mortgages, rent arrears and fuel bills must be paid off first, followed by loans and credit cards, although family could still be faced with contacting each of the creditors to explain the situation, which is extremely distressing.

Things get a little more complicated if, like many of us, you have a joint mortgage, bank account, credit card and/or loan. This is an occasion where families do technically inherit debts because they are then responsible for the outstanding amount. You should be aware that an individual’s legacy could also be at risk if they’ve amassed debts as a sole trader or acted as a guarantor for a loan or mortgage for someone who is unable to pay, since the creditors will look at their estate.

If the individual has a large mortgage, high interest loans or car finance in both of their names, consider putting safeguards in place to protect their finances after the individual in question is gone. Life insurance policies can be cheap to buy if someone in reasonably good health, and give them peace-of-mind that their dependents would receive a lump sum to pay off the mortgage. Remember that it works the other way too, so make sure their partner is not accruing debts in their name.

The phrase ‘get your house in order’ is often used as we get older, and it certainly rings true here. Encouraging people who may be struggling with debts to reach out for help is the first step towards helping them become financially free.

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