One of the most common questions regarding the probate process is “What happens to debt when you die” ? It’s an important issue – as the person who undertakes to administer the estate may be personally liable to the deceased’s creditors.
Fortunately, unless the administrator has a joint loan with the deceased, or provided them with a loan guarantee, they aren’t automatically responsible for their debts as long as they take the right course of action when dealing with the estate.
Executors are under a duty to administer and distribute the deceased’s estate correctly.
One of the key responsibilities of the executor is paying any debts from the estate before distributing the estate to the beneficiaries. When answering the question “What happens to debt when you die?” the simplest answer is, it doesn’t die with you. There is still a duty to pay the debt.
If the executors distribute the estate without paying a creditor then the creditor may bring a claim against the executor even through the executor may not have known of the debt. In this event, the executor may be personally liable.
Placing Section 27 Trustee Act Notices in the London Gazette and in a local newspaper will provide some protection to the executors. These notices allow a two month period in which any creditors can notify the executors of any claims. If the executors have not received any notification of a claim during this period then they can distribute the estate. Any claim brought after the two month period is held against the beneficiaries of the estate and not the executors.
This is a good example of why it’s so important to get the right advice at the outset from an experienced and reputable probate specialist.
Debts are paid from the estate
Here’s how debts are managed within the probate process. When the value of the estate is above a certain threshold, the administrator, or executor, must apply for probate, or letters of administration to deal with the financial affairs of the deceased, including paying off any outstanding debts.
The value of all the assets and all the debts must be precisely ascertained and paid, before any balance can be paid to persons named in the will. This is why it’s advisable to advertise for unknown creditors in the form of a creditor notice in a local newspaper, or in the wills and probate section of The Gazette, online or in print.
Debts will need to be paid in a set order of priority before any other allocations in the will can be made. Starting with any mortgages, if applicable.
If the partner of the deceased is the administrator, then it’s possible that they owned a home together. In the event that there is not enough funds elsewhere in the estate to pay off any debts, there is a chance this, or any other properties in the estate, will have to be sold to make up any shortfall. Avoiding such as sale will depend of whether the property was owned as “tenants in common” or “joint tenants”.
Tenants in common – If each partner owned a stated share of the property, then the share belonging to the deceased becomes part of their estate and outstanding debts must be paid from that share. To avoid the sale, the surviving person with a share in the property will have to negotiate with the creditors, or find the money to pay the debts themselves and this may include obtaining an executors loan.
Joint tenants – In the event of joint tenants, or owning the property together, the deceased person’s share automatically passes to other person’s estate. That doesn’t necessarily mean the outstanding debts are avoided. Creditors can apply for an “Insolvency Administration Order” within five years of the death. This can have the effect of dividing the property in two and forcing a sale. So it’s in the interest of the remaining homeowner to come to an agreement with the creditors regarding the debt before this happens.
Different types of debts
Mortgages and secured loans
Most mortgage providers require a life insurance policy to be taken out to cover the mortgage in case the mortgage holder passes away. Although this is always advisable, it is not always the case. If there is no such policy, the property may have to be sold. Any debt from this will also be needed to pay off personal loans secured against the property.
Unsecured debts are next. The executor of the estate is usually a solicitor, but the deceased’s partner or other relative may be responsible for ensuring debts are cleared. If the estate is insolvent, then it’s also their responsibility to let creditors know that this is the case.
These debts include those payable to local and central government, such as tax, followed by utility bills, bank loans and credit cards. For joint tenants, the surviving tenant will be responsible for rent arrears. If they are a joint holder on a credit card or personal loan, the administrator will need to check the fine print to see if they are covered by a repayment plan. Likewise, any joint financial products will typically pass over to the surviving person named on the credit agreement.
If the deceased’s bank account was in their sole name, any money cannot be accessed until the estate is fully reckoned. It’s a good idea to use a tool such as My Lost Account to track down any dormant accounts.
When working out on how much is available to cover the debts of the deceased, bear in mind that expenses may need to be taken from the estate to cover funeral costs if there is no plan in place. There may also be other costs such as estate agent and additional solicitor costs when dealing with someone’s estate.
Getting the right probate advice
Some executors/administrators act without a solicitor, but this isn’t advisable. Debts don’t die with you and dealing with debt probate can be a complicated process. Which is why it’s so important to get the right advice from an experienced professional. To help, at the The Probate Network, we offer a free 20-minute legal consultation which can be booked using the link below.