What happens to debt after death? Inheriting a costly burden
When someone passes away, their loved ones usually expect their debts to vanish.
Unfortunately, this isn’t always the case. While it’s true that Britons are legally unable to automatically become liable for the debts of a parent or a spouse upon their death, the outstanding balance isn’t simply ‘written off’.
Debts are on the rise. Almost half (44%) of Brits are now classed as financially vulnerable. 7.4 million of us feel “heavily burdened” by debt and the average household is steadily incurring more debt. However, in most cases, it is not possible to inherit debt upon death.
Instead, debts owed become the responsibility of the deceased’s estate - a fact that often surprises people. Whether you’re an executor, a creditor, or simply someone planning ahead to better relieve their own financial strain, understanding the reality of death and debt is crucial.
Debts owed at the time of death don’t disappear into the ether. Instead, they become the express liabilities of the deceased’s estate.
In this context, the estate includes the deceased’s assets, such as (but not limited to) property, bank accounts, and personal possessions. If a person has unresolved debts at the time of their passing, these resources are then leveraged to settle outstanding balances in a specific order, determined by British inheritance law.
If the estate has enough value to cover the debts, creditors are paid first, and any remaining assets are distributed to beneficiaries. But what if the debts outweigh the estate’s assets? This is known as an insolvent estate.
In these cases, the executor or administrator (if there is no uncontested Will in place) must follow strict insolvency rules to manage the estate. Ignoring these rules or paying creditors out of order can expose the personal representative to legal liability.
Taking on the role of executor can be a complex undertaking that comes with significant responsibilities. These include:
Executors are responsible for gathering all information about the deceased’s financial obligations. This can involve tracking down everything from unpaid utility bills to mortgage payments and large personal loans.
To pay off debts, estate assets - typically comprising property, savings, or high-value personal items (such as cars or collectables) - might need to be sold.
Executors must ensure that all creditors are paid - in the correct legal order. For example, funeral costs and secured debts typically take precedence over unsecured debts like credit cards.
Critically, if the estate does not have sufficient funds to cover the debts, executors may need to apply for an Insolvent Estates of Deceased Persons Order. This will allow the estate to be handled under the Insolvency Act 1986, which provides a structured process to deal with creditors fairly and protects the executor from personal liability - which is an important safeguard, especially during what is likely to be an emotionally charged time for loved ones.
In the vast majority of cases, assets held as joint tenants pass to the surviving co-owner. This happens automatically through the rule of survivorship.
However, insolvency practitioners can sometimes challenge this rule in a bid to recover debts from the deceased’s share of the property. The impetus behind such challenges is likely to be that there are insufficient assets in the estate to pay outstanding debts - but of course, every circumstance is unique.
While challenges to survivorship are rare, they can create significant financial and emotional strain for surviving family members. For this reason, executors and joint property owners should seek expert advice as early as possible if there are concerns.
Dealing with the financial aftermath of a loved one’s death is never easy - there can be a lot of conflicting messages to weigh up during an especially emotionally charged time. If you're concerned about your own debts, or unsure of your liabilities should the worst happen, reach out to our expert team today for bespoke legal advice to help you offset debt and offload the administrative burden.
Contact Gary to discuss this further.
