What happens to debt when someone dies?

Managing debts at a difficult time

Dealing with the loss of a loved one is not only an emotionally distressing time, it can also take a toll on family finances.

Here's some information to help you deal with debt essentials during this difficult time.

What types of debt could be left behind?

Secured debts

A secured debt is essentially a type of loan that is guaranteed by collateral (eg a house or car). As secured loans provide less risk to the lender, the rates you'll get as a borrower are usually lower than on an unsecured loan.

Types of secured debts include mortages, car loans and some personal loans.

If someone passes away, these will be the first type of debt that needs to be settled.

Unsecured debts

An unsecured debt means that money has been borrowed without any kind of collateral or guarantee behind it.

Types of unsecured debt include credit cards, overdrafts or even utility services.

As the risk to the lender is higher, you'll usually pay a higher interest rate on these types of debt.

Who is responsible for paying off the debts?

Joint debts

Where a debt if held jointly (eg a joint mortgage) or where 2 or more people are named on the credit agreement, the other parties will still be responsible for paying the total amount of the debt.

In this situation, the most important thing to do is notify the companies you've borrowed from as soon as you can. Ask them for a breakdown of the amounts that still need to be paid and work with them to understand how to repay the outstanding amount.

Individual debts

If a debt is only in one name, then it will usually either be settled using money from 'the estate' of the deceased person or written off if there aren't sufficient assets to pay off the amount.

If your spouse has passed away and the debt was only in their name, you won't inherit the debt.

Any beneficiaries named in a will also won't inherit any debt (though any amount they receive from the estate will be reduced after funeral costs and debt payments).

How are debts paid off when someone dies?

Usually, debts are paid off using the value of the estate in order of importance.

The 'value of the estate' is the total amount of money an individual has in savings, investments, property, possessions or cash. The value of the estate of will be used to cover funeral costs and any debts the person had that can be settled.

Secured debts like mortgages are paid off first, followed by funeral costs and administration fees. Lastly, any unsecured debts need to be covered.

If the value of the debt is more than the value of the estate, these will usually be written off by the creditors, but it's a good idea to consult with a solicitor or probate specialist on this.