What happens to debt when you die?

Debt is a worrying topic, especially after a bereavement.

Could you become responsible for someone else's debt or would your family become responsible for yours?

Below we explore exactly what happens to debts after death. 

What happens to your debt when you die?

Typically, when you die, any unsettled debts are paid from your estate.

Your estate is made up of any savings, property and possessions that you leave behind.

While someone won't be responsible for paying them off out of their own money, someone will need to be appointed to make sure your debts are paid from your estate.

This will either be the executor of your estate or an administrator.

It's reassuring to know that, in most cases, debts won't automatically get passed on to someone else unless they share a financial responsibility for the debt. 

What is debt?

Debt is defined as a sum of money that is owed.

Did you know there are different kinds of debt?

• Individual debt – these are debts that are solely in your name. For example, car finance. Family members won’t have to pay these back after death. They're settled from your estate. If there aren’t enough funds to pay off all debts, the debts are paid in priority order until the funds run out.
• Joint debt – if you die with a joint debt in place, the remaining debt passes over to the co-signer. For example, if you have a joint mortgage and your partner dies, you would become responsible for the full debt.
• Secured debt – secured debts are taken out against an owned asset, like your home. After your death, they must be paid from your estate before unsecured debts. The asset could be recovered by the lender if the debt wasn’t paid off before death.
• Unsecured debt – for example, credit card debt or an overdraft. Unsecured debts fall last on the priority list so will be paid last after all other debts have been settled.

Who is responsible for debt after death?

After your death, the executor of your estate is responsible for making sure debts are paid from your estate.

You’ll name who you’d like to be the executor of your estate in your will. It’s often a family member, friend or solicitor.

If no will is left, your closest living family member can apply to become an administrator of your estate. They’ll then have the same responsibilities as an executor. 

What happens to your debt when you die with no estate?

What happens to debt if you die with no estate depends on what type of debt you had.

If you had individual debts that were solely in your name, these debts would typically be wiped and no one would need to pay them back.

If you had debts that you co-signed with someone else, the full cost of the debt would fall to the surviving person.

If you had debts that someone acted as a guarantor for, the debts would need to be paid by the guarantor.

Do you inherit your parents debt when they die?

No, you won’t inherit your parents debt when they die.

When a parent dies, their debts will be paid from their estate, it’s not your responsibility to pay them with your own money.

If your parents name you as the executor of their estate then it will be your responsibility to pay their debts from their estate, you wouldn’t need to use your own money.

You would only inherit debt from your parents if you have a joint debt with them or if you have acted as a guarantor for them.

Can you inherit debt from your spouse?

You could inherit debt from your spouse if you share a joint agreement. For example, if you have a mortgage together.

You won't become responsible for their individual debts. 

How can I protect my family from debt?

We know it’s not nice to think about life when you’re no longer around. But there are some important steps you might want to consider to help your loved ones out when the time comes:

Make a will

A will allows you to specify your final wishes. For example, who inherits what and how much, as well as who will get guardianship of your children.

Despite being a great way to protect your loved ones, nearly 40 million people in the UK don’t have a will. A fifth of people don’t believe they need one.

If your final wishes are written down in a legally binding document, it can prevent any disputes between your loved ones.

Buy life insurance

Another way to protect your nearest and dearest is to buy a life insurance policy.

Life insurance pays out a lump sum to your loved ones if you die during the policy term.

If you write your policy in trust, it detaches the pay out from your estate. This means your family will benefit from the full pay out as it won't be subject to inheritance tax.

By not forming part of your estate it also means the funds won't be used to pay off your debts.

If you’d like more information on life insurance, or you’d like to compare quotes, why not use Confused.com?

Keep your documents safe

Make sure any letters in regards to your debts are easily accessible. That way your loved ones know what debts you had and what needs to be paid from your estate.

The same applied to your will and/or life insurance. Make sure these documents are easy to find so your loved ones know who to contact.