Death is never a pleasant situation for anyone but dying in debt makes things even more unpleasant for a surviving spouse or family members. While these individuals come to terms with the loss of a loved one, they must figure out how to handle the debts of the deceased. Many people are in debt when they die. Family members do not inherit debt the same way they inherit assets of the deceased.
An estate is comprised of cash, property, possessions, and investments. The process of dealing with an estate of a deceased individual is called probate. In general, responsibility for debt rests with the person or people who signed the initial credit agreement. If the debt was held jointly with another surviving person such as a spouse, that individual is responsible to pay it. A surviving spouse or family member is not responsible for repaying the money unless the credit was also in his or her name.
Creditors may check probate to claim debts upon the death of the debtor. The estate must repay outstanding debts of the deceased in a specific order before anything included in it can be distributed to people named in the will of the deceased. In some cases, the home may need to be sold to repay debts of the deceased, even if it is jointly owned.
The joint tenant in a rented property is responsible for repaying rent arrears. If an individual takes over tenancy, he or she is not liable for previous rental arrears. Anyone still living in the home of the deceased must repay arrears and ongoing charges for water rates and council tax. This person may also be liable for fuel bill arrears. Overpaid benefits or pension and tax owed are paid from the estate.
Repayment of credit debt, credit cards, and personal loans is made after other debts are settled. If the estate does not have enough money to repay these personal debts, the individual responsible for handling the estate should notify creditors to stop pursuing the debts. Creditors will then usually write off the debts.
If a credit card or loan account included payment protection insurance, this might include death coverage. In this case, money to repay the debt may be recouped from the insurance company instead of the estate of the deceased or from a survivor who signed a joint credit or loan agreement. Otherwise, the surviving joint owner can be held responsible for repaying all or a portion of the debt or loan balance.
Life insurance is used to cover survivors financially should the insured die. It is normally used to provide a lump sum for handling post-death expenses like funeral costs, outstanding personal debt, or repayment of a mortgage. The beneficiary designated in the insurance policy receives the money directly.
If the policy is not written in trust, the money represents part of the estate of the deceased and is used to repay inheritance tax and debts. Life insurance can be linked to a loan and used to repay all or a portion of its balance.