When someone you love dies it is already a traumatic time and if you are worried you might inherit debt it is even more difficult. It is important to know that debts are paid off by a person’s estate. Their property, savings and investments can be used to meet their liabilities.
In England and Wales, it is unusual for someone to inherit debt, but there are a few exceptions. Here we talk about what happens when there isn’t enough money in an estate to pay off debts.
Can you inherit debt in certain circumstances?
As long as debt is held only in the name of the person who has died it cannot usually be inherited. This type of debt is referred to as being in their ‘sole name’.
There are two exceptions to this. The first exception is if the debt was guaranteed by a third party. In this case the third party becomes liable. The second exception is if the deceased person gifted money a short while before they died. If they did so, creditors might see it as a way to avoid paying debt and so they could pursue a claim.
What happens to joint debts?
When there are joint debts, such as mortgages or utility accounts, the surviving account holder becomes liable for the full amount.
If you are liable for joint debts after a loved one has died but you cannot afford the repayments it is important to contact the relevant organization (i.e. the utility company or bank) as soon as possible. Our advisors at NBS can also signpost you towards the best sources of help.
Can beneficiaries be paid whilst there are outstanding debts?
No. All debts, including funeral costs, must be paid before an estate is divided amongst the beneficiaries of a will. Only after all creditors have confirmed in writing that files are closed and any remaining debt written off, can money be given to beneficiaries.
Beneficiaries should not be given any belongings that may be of value, such as jewellery or a vehicle, if there is any possibility that these items may need to be sold to meet debts. However, it will usually be better to dispose of ordinary household items and clear a property to avoid paying additional rent on a rented property.
If you are responsible for administering a will, it is very important to follow correct procedures for distributing assets and paying debts, otherwise any creditors may hold you personally liable. Please contact our advisors at NBS for any help you need.
What if there isn’t enough money in the estate to pay off debts?
If an organization, such as a bank or building society, has multiple accounts in the deceased person’s name (for example, a current account, a savings account, a credit card and a loan), they can pull all the accounts together to discover if there is an overall positive or negative balance. If there is an overall debt to the bank it won’t be possible to take money from a savings account, for instance, to pay for funeral costs.
Sometimes people have life insurance policies which can cover debts and funeral expenses. If there is a life insurance policy in place, an executor of a will can make a claim to meet funeral costs and debts.
When there isn’t enough money to pay off all debts then they must be tackled in order of priority.
In what order of priority must debts be paid?
This is the order of priority for paying off personal debts:
- Secured debts. Examples of a secured debt are a mortgage on a property or a loan for the purchase of a car. Creditors will try to recover what they are owed by selling the asset. If the sale of the asset doesn’t cover the entire debt, then the debt will fall under the ‘unsecured debt’ category.
- Funeral expenses. Funeral expenses must be reasonable and proportionate to the size of the estate taking into account likely debts. For example, you can’t spend £6000 of a £7000 estate on the funeral if there are debts of several thousands of pounds. A gravestone or other permanent memorial is not considered to be part of the funeral expenses. Family members who pay for a funeral from their own money may find it difficult to recover the money later if there are other creditors.
- Testamentary expenses. These are the expenses incurred as part of the administration of an estate. Careful records of these should be kept along with any receipts for petrol or train journeys, postage etc.
- Preferential debts (also called ‘preferred debts’). These are debts that must be paid before other unsecured debts. Wages due to employees are classed as preferential debts. It is very rare for an estate to have preferential debts.
- Unsecured debts. This includes debts to local and central government, utility bills, bank loans, credit and store card debts.
- Interest due on unsecured loans.
- Deferred debts. These are the least important debts and they do not have to be paid until all other debts have been fully paid. Informal loans between family members fall under this category.
All the debts in one category must be paid off before moving onto the next category.
If there is insufficient money to completely clear the debts in a particular category, then money should be paid to each creditor in proportion to the money owed. With small debts it may be possible to reach an informal agreement with creditors.
What other debts might there be?
Any money a deceased person owed such as taxes or state benefits will need to be paid back.
Conversely, overpayments for pensions and taxes may need to be reimbursed to the person’s estate.
The HMRC’s bereavement tool can help will executors to find out whether any money is owed to the estate or needs to be paid back.
Is Inheritance Tax payable?
Inheritance Tax is payable on the proportion of an estate valued over £325,000 (unless there is an exemption, such as when an estate is left to a spouse or civil partner).
However, the value of an estate is the amount it is worth after all debts have been paid off. So, if there isn’t enough money left after debts have been paid then no Inheritance Tax is payable.
Are you concerned you may inherit debt?
If you are worried about debt after somebody has died, or you are the administrator of will, NBS can advise you.
We can answer all your questions and signpost you towards the best sources of practical help. For trusted advice at a difficult time please contact us on 0800 024 6121 or info@thenbs.org
