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Tuesday, 28th April 2009

063-gravestone-debtsWhat happens to my debts when I die?

It is not unusual for some people to think that when they die their debts will die with them. This may be the case if they have no assets, savings, investments or insurances. If you do have assets then these are likely to be sold to clear any debts. Debts in joint names with your partner for example are payable after your death. But they become the responsibility of your partner.

What is the estate?

When someone dies, their assets, made up of their money or savings including any payouts from insurances and investments and the value of any property and possessions add together to make up the worth of that person, referred to as their estate.

If a will has been made then someone would often have been named as executor, usually a relative, friend or solicitor, who will take charge of the deceased's person's affairs.

If no will had been made then the person is deemed to have died intestate. This means that an administrator will need to be appointed to carry out the same duties as the executor but in either scenario the first undertaking is to get the estate valued and for any outstanding debts to be repaid.

What is a joint liability?

Unless any of your debts are in joint names, you will not be responsible for any wife's, husband's or civil partner's debts on their death.

However in the case of a debt in the name of more than one person, typically a mortgage held in the husband and wife's names, and any loans secured on the house or unsecured personal loans and overdrafts, each named person is liable for the whole debt.

Who gets what?

Before any monies can be paid to people named in the will the executor has to pay any of the deceased's debts in a strict order of priority;

  • Funeral and testamentary expenses (costs for dealing with the estate)
  • Mortgage or secured loan on a property
  • HM Revenue and Customs
  • Department of Work and Pensions, in case there are any overpaid benefits
  • Any unpaid pension contributions or wages.

If all the debts can be paid but there isn't enough money left in the estate to pay what is set out in the will, for example legacies, where a specific amount is to be paid to a person first, then the other named people mentioned in the will receive what is left over.

If there is not enough to pay all the legacies then those owed will get a proportion of what was due, depending on how much money is available in the estate. Any other people mentioned in the will, who were due the remainder, will end up with nothing.

It is important to remember that as executor or administrator you may be asked to submit a tax return for the person who has died and you could be liable for any debts if you pay the beneficiaries without clearing all claims and debts first.

Can I be forced to sell my home?

If the home was jointly owned and you do not have enough money to clear the deceased's debts and any claims on the estate then there is a possibility that your home would have to be sold. However your options to avoid a sale will depend on whether you owned the home as 'tenants in common' or 'joint tenants'.

Tenants in common

This is where each of you owned a stated share of the property. The share that belonged to the person who has died will then become part of their estate and will pass on to whoever is mentioned in their will. However any debts that are outstanding will need to be cleared from this share.

If you wish to avoid the home being sold then you will need to negotiate a settlement with the deceased's creditors.

Joint tenants

This is where you both own the whole property and upon the death of one partner their share will automatically pass to the surviving partner.

In effect the asset has passed from the deceased's estate to yours but this does not give you total protection and you may still have to address any debts and claims.

Within five years of the death creditors can apply for an Insolvency Administration Order. Once granted this can divide the property in two and subsequently lead to a forced sale. In this event you will need to negotiate a settlement, if there are debts and claims on the deceased's estate.

You can find out whether you have a Joint Tenancy or Tenancy in Common by checking the Transfer or Lease document when you purchased the home and you could check if you have a Trust Deed or if it is mentioned in the will.

Important check list

It is worth checking if the deceased's person's debts are covered by:

  • payment protection insurance for personal loans or credit cards
  • mortgage protection/life cover insurance
  • death in service from a pension – if the person dies before pensionable age.

How different debts are paid off (these are not in order of priority)

Mortgages

If the mortgage lender required a life insurance policy then this may pay off the full amount of the loan. If it only pays a limited sum or if there is no insurance, or if there were second mortgages not covered by insurance, then the property may have to be sold.

Rent arrears

If you're a joint tenant in rented property then you will be expected to pay any rent arrears.

Water rates

Those adults residing in the home will be responsible for any arrears and for ongoing charges, even if their name isn't on the bill.

Council Tax

If you remain in the home then you will be responsible for any arrears and ongoing charges, even if your name isn't on the bill. There is a 25 % reduction for being the only adult in the house. Council Tax will cease when no one lives in the house.

Fuel bills

You could be liable for any arrears if you were previously living in the property.

Hire purchase (HP agreements)

The HP Company will own the item until the last payment has been made. If over one third of the agreement has been paid then the HP Company will need to obtain a court order to get the goods back. If half or more of the agreement has been paid with out any arrears then check the agreement terms and conditions as it may be possible to hand the goods or vehicle back without having to make any further payment.

Further information on death and bereavement can be found here at www.direct.gov.uk

 

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