What happens to personal debt after death?
By Maplebrook Wills
20th Jul '18
Legacy Planning, Trusts, Wills
Debt after death
If you’re in debt when you die, one of two things can happen. If you’ve already been declared bankrupt, the proceedings carry on largely as before.
But if you hadn’t been declared bankrupt, your creditors will be able to claim what they’re owed from your estate.
After that, the person looking after your estate – the executor or administrator – must pay off individual debts before distributing the remainder of the assets.
Any joint debts, such as overdrafts on a joint current account or a loan taken out by two or more people, can be transferred to one of the surviving parties.
You may have an insurance policy that will pay off some debt, such as a life insurance policy that pays off a mortgage if the homeowner passes away. Your surviving partner or relatives will need to make a claim from the insurance company.
Solvent and Insolvent Estates
If there are more assets in the estate than debts, the estate is known as the solvent. But if there are more debts than assets, it’s an insolvent estate. Your executor could be financially liable if they don’t follow the correct procedure in dealing with it.
In that situation, your personal representative can apply for an Insolvency Administration Order, which appoints a trustee to manage the estate.
The estate is then administered in the interests of creditors and the debts must be paid off in a particular order.
Top priority is debts that are secured against assets like your house (in the case of a mortgage) or car. The assets can be sold off to pay the debts.
After that comes the costs of paying for the funeral and administering the estate.
Once those have been paid, unsecured debts must be settled. These aren’t borrowed against assets and typically include credit card loans, outstanding council tax and electricity bills.
Trusts can protect against creditors
Is there any way to stop creditors claiming against your estate? The answer is yes – a property held in trust is protected against creditors, so it can’t be sold off to pay debts.
A trust is a legal entity and is not owned by you. Instead, it is controlled by trustees, who you appoint at the time of setting up the trust.
However, you cannot be insolvent or bankrupt when you set up a trust. In any legal action, the courts will most probably determine that you were trying to hide assets or escape debt. They’ll see the exercise as a sham and simply set the trust aside.
What about hidden debts?
In some cases, people have debts that their family or friends didn’t know about. Creditors can make claims years later, only adding to the stress of surviving relatives.
To get around this, relatives can place an advert in local newspapers in several areas for 60 days before arranging to pay any debts.
This is a way of demonstrating you’ve done all you can to find creditors and gives them the opportunity to come forward and make a claim.