Death is never an easy situation and it is especially troubling when the deceased was in debt. When a UK resident dies, their debts are paid out of their estate, which is the assets and money they leave behind. Another person will only be held responsible for debts of a deceased if a party in a joint agreement or loan or made a loan guarantee. A civil partner or spouse is not automatically deemed responsible for the debt.
An estate is comprised of cash, investments, possessions, property, and life insurance proceeds. If the deceased had a will, the person designed to handle the estate is called the executor. If there is no will, someone can come forward to serve in a similar capacity as an administrator. Based on the value of the estate, the individual may need letters of administration or probate authorizing him or her to handle the estate, including debt repayment.
If there is not enough money in the estate to repay all debts, the estate must repay debts in a specified order before the money is used up or distributed to anyone named in the will. Debts that must be repaid include mortgage payments, rent arrears for joint tenancy, water rates, council tax, fuel bills if living jointly in the property, hire purchase agreements, overpaid benefits, and tax debts. Once these have been paid, credit, credit card, and personal loan debts must be repaid. If cards are jointly held, the joint owner is responsible for any debts.
If the deceased held money with another individual in a joint building society or bank account, this money does not represent part of the estate. However, the deceased individual’s share of any joint property is treated as part of the estate for inheritance tax calculations. If the two people were not beneficial joint tenants, the share of the property owned by the deceased becomes part of the estate.
If the home was owned together by the spouses and the remainder of the estate does not contain enough money to repay debts of the deceased, the home may have to be sold. If a tenants in common ownership was established, the share owned by the deceased becomes part of the estate and is provided to the named beneficiary. However, this share must be used to pay remaining outstanding debts.
If a joint tenancy was established, the couple owned the entire property together and the share owned by the deceased automatically passes to the surviving spouse. This does not mean that outstanding debts can be ignored. Within five years of death of the spouse, creditors may apply for an Insolvency Administration Order, which divides the property and forces its sale.
Surviving spouses should check for insurance that may cover debts of the deceased. These include death coverage for a mortgage, payment protection coverage for credit cards or personal loans, and death in service benefits from a pension plan. If the estate and insurance do not provide enough money to repay the debts, a debt management professional should be contacted.