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Guide

What happens to your debt when you die?

Published: 20 November 2024

It can be challenging when dealing with the finances of someone who’s died. Or if you’re trying to understand how your own end of life finances will work out. And these challenges can be intensified if you have debts. Because we don't tend to talk about our debts, it’s not always clear what happens to debts when someone dies.

In this guide we throw some light on the answers around what happens to debts when you die. We cover whether you can inherit debt and what happens to credit card debt and mortgage debt. Plus, whether you can protect your family against the cost of your debts when you die.

Does debt die with you?

No, your debts don’t disappear when you die. Your estate will pay them off. Your estate is the total of all the things you own.

Only debts that are in your name get paid out of your estate. This can include your individual debts and your share of joint debts. An individual debt is something like your personal credit card bill. A joint debt could be a mortgage that you took out with your partner.

The law treats these two types of debt differently depending on how they are set up. We cover this in more detail below.

Your debts are deducted from the assets you have, such as your savings and investments, before your family can inherit your estate. Debts are repaid in order of priority until the estate runs out of money. Any outstanding debts will then probably be written off.

Learn more: Estate Planning Explained: Why You Need a Plan

Who will pay your debts when you die?

The executor sorts out your finances following your death. This includes dealing with any debts.

An executor is someone named in your will who has the legal authority to deal with your estate. If there’s no will, then someone can apply to become the administrator of your estate instead.

The executor doesn’t pay the debts themselves. They administer your estate and pay your debts from the money you leave behind.

Debts are repaid in a certain order. First to be repaid are secured debts, like a mortgage. Next are priority debts, such as outstanding tax bills. Finally, unsecured debts can be paid, such as credit card bills.

What about joint debts?

If you have a debt with another person, such as a mortgage or credit card, the debt will pass to the surviving partner. They will be expected to continue paying off the debt.

However, they will only need to pay the debts where they are named on the loan as jointly liable. They won’t need to pay off any of your individual debts.

What happens to mortgage debt?

The largest loans many couples have is their mortgage. These secured loans and so they are usually the first debts to get paid. Your executor will need to know how the mortgage is set up so they can work out if there is a debt to pay.

As a ‘joint tenant’, each person owns the whole property. So, when one person dies, the whole property transfers to the other owner. This means that it’s no longer part of the deceased person’s estate and can’t count as an asset. The surviving partner will need to cover the whole mortgage to continue living in the property.

If you are ‘tenants in common’ with your partner, you each own half of the property. When one of you dies, their half of the property goes to whoever they name in their will. This means the deceased person’s share will form part of their estate and be available to pay off any debts. This means you may need to sell the property to settle these debts.

Taking out mortgage protection insurance can help your family keep their home. It’s a type of life insurance that pays off your mortgage if you become terminally ill or pass away within the policy term.

Learn more: What is Mortgage Protection Insurance? A Complete Guide

Does your family get your debt when you die?

No, your family won’t need to pay off your individual debts when you die. The only time they’ll need to manage your debt is if they’ve agreed to be a guarantor.

A guarantor is a person who guarantees to pay the loan if you can’t make the payments. For example, parents will often act as guarantors for their children when they pay rent for the first time or apply for a credit card.

Your debts are usually repaid by your estate. When you die, everything you own is valued. This amount is your estate. If you have debts, these come out of your estate before your family can inherit their share.

Some people who expect to have debts when they die take out life insurance to cover the debts. This means their family can benefit fully from their inheritance.

What happens if there’s not enough money to pay outstanding debts?

After valuing the estate, if there isn’t enough money to pay off all the debts, the estate is considered insolvent. This means the people who are owed money  - the creditors - are unlikely to get what’s owed.

The executor should contact the creditors to explain that the estate is insolvent. They may be willing to write off the debt if there’s no security or guarantor.

If there is some money in the estate, the creditors get paid first. The beneficiaries are only paid once all the debts are settled.

Creditors get paid in a certain order, with secured debts being the first to be repaid. Your executor will also take basic funeral and other administration costs into account. If there are several creditors in any one category, the estate is split between them.

Life insurance can secure your family’s future

It’s tough to talk to your family about how they’ll cope financially if you die. But so important to make sure they’ll continue to have enough money. It’s particularly important if you earn more than your partner or are a sole parent.

Life insurance gives your loved ones a lump sum when you pass away or if you’re diagnosed with a terminal illness. A life insurance payout can help to:

  • pay for day-to-day living expenses
  • cover education costs
  • maintain your family’s standard of living
  • supplement a lack of savings
  • repay debts such as your mortgage or credit card bill.

Having a life insurance policy means that debts can be repaid out of the life insurance payout leaving your savings and assets for your family.

There are a range of life insurance policies tailored to the type of mortgage you have. Repayment mortgages can be covered by decreasing term insurance. Interest only mortgages by level term insurance.

There's no income or capital gains tax on life insurance payments made to your beneficiaries.

However, unless the policy is in trust, it will become part of your estate and may be liable for inheritance tax. This is a tax paid on estates that are worth over £325,000.

Learn more: Understanding Life Insurance and Inheritance Tax

Should you put your life insurance in a trust?

When you put a life insurance policy in trust, it’s no longer counted as part of your estate. The policy sits outside of your estate, so is not subject to probate which can take time to sort out. Probate is the legal right to deal with someone’s estate. Your executors will often need to apply for probate before they can access your finances.

With a life insurance policy in trust, the life insurance policy goes to the people you choose to receive it – your beneficiaries. Even if you have debts. And it’s often paid quickly as it doesn't go through probate.

Plus, if you think you’ll need to pay inheritance tax on your estate when you die, you can take out an insurance policy in trust to cover the tax bill. This means the people looking after your estate can settle your inheritance tax bill without using assets from your estate.

Learn more: Life Insurance and Trusts Explained

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Key takeaways

    • When considering what happens to debt when you die, it’s important to remember that your debts don’t die with you. Instead, they’re repaid by your estate.
    • But only debts that are in your name are repaid from your estate. This includes your individual debts and your share of joint debts. An individual debt is something like your personal credit card bill. A joint debt could be a mortgage that you took out with your partner for example.
    • Before your family can inherit your estate, your debts will be deducted from the assets you have, such as your savings and investments. If there isn’t enough money to pay off all the debts, the estate is considered insolvent. It’s likely that your debts could be written off at this point.
    • Life insurance can be a valuable tool to help pay off your debts when you die. It gives your loved ones a lump sum when you pass away or if you’re diagnosed with a terminal illness. And when you put a life insurance policy in trust, the life insurance policy goes to the people you choose to receive it – your beneficiaries. Even if you have debts. This means that debts can be paid out of the life insurance payout leaving your savings and assets for your family. 

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Debt after death FAQs

Can debt be written off due to death?

Not unless your estate is considered insolvent. If you have assets, they will be used to pay off your debts. Only after the debts have been settled will your family inherit your estate.

Do I have to pay my deceased mother's credit card debt?

If the credit card is in her name only, then no, you don't have to pay it. The amount owed will be paid out of her estate. If you are jointly named on the card then you will be liable for the debt.

Who is responsible for debt after death?

The executor of your will is responsible for paying your debts after your death. They’ll find out who you owe money to and pay your debts from the value of your estate.

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