When a parent passes away, it can be a really difficult time, both emotionally and financially. Alongside the natural feelings of grief and sadness that comes with a death in the family, there is also usually a good deal of administration you need to take care of, including getting the financial affairs of the deceased in order. One common concern during this time relates to whether or not children can inherit their parents’ debt.
In this guide, we look to answer this question, exploring if you can ever be responsible for someone else’s debts, with a particular focus on what happens when a parent leaves behind debts.
Do you inherit your parent’s debt?
Put simply, no – you cannot inherit debt from your parents. In the UK, debt can’t usually pass to another person. This includes parents. After all, if you’re not named on any joint credit agreement and/or you didn’t allow your name to be used as a guarantor, then any debt your deceased parent may have can’t be transferred to you. However, if you are listed on any credit agreements involving your deceased parent, you will be solely responsible for repaying this debt.
It’s important to note that while sole debt cannot be ‘inherited’, it can still impact how you’re expected to deal with your deceased parent’s estate after they have passed away. This is to say, if you’re named as the executor of their Will, you may be responsible for managing their debts and ensuring they’re settled.
This might involve liquidating assets such as property or selling valuable vehicles to cover any outstanding debts in their name. Consequently, any inheritance you expect to receive may need to be used to clear these debts, potentially resulting in receiving less than originally expected. In this way, you can be indirectly impacted by your parents debts even if you cannot technically inherit them.
Will my parents’ debt affect my credit score?
No, a parents’ debt should not impact your credit score. This is because your credit report cannot be affected by anyone’s finances other than your own, unless you have a financial association with them. A financial association is anyone you’re connected to through joint finances or a joint credit account. This means, unless you have joint finances with a parent, your credit score won’t be impacted by their debt.
What is undisclosed debt?
As a name suggests, undisclosed debts connected to a deceased parent are debts that you don’t know anything about. This could include anything from concealed credit card debts to hidden personal loan or gambling debts. Although as a child of the deceased, their executor, or both, you cannot directly inherit these debts, you can indirectly face responsibility for them in some circumstances.
This is because executors must work to thoroughly identify and settle all debts owed by the deceased, paying them using funds in the deceased estate, to avoid personal liability. If you fail to do this, as the executor, you could find yourself personally liable for repaying undisclosed debts that come to light after the estate has already been distributed.
To avoid this from occurring, it can be a good idea to advertise in a local newspaper before settling the deceased’s debts. This gives all creditors the chance to make any claims they may have. While this is not a legal requirement, by placing a Deceased Estates Notice you can cover your own back.
On top of this, to further mitigate the risk you take on as an executor, you should also notify all potential creditors following your parent’s death and, if you think there could be further undisclosed debts you’re still not aware of, it could be worth seeking professional advice.
How to pay off parents’ debts after death
Managing a parent’s financial affairs following their passing can be overwhelming, especially if there is significant debt involved. However, by following a few simple steps, you can ensure any creditors are paid appropriately and assets from your parent’s estate are distributed in accordance with the law, in a stress-free manner. These steps include:
Inform creditors and check for undisclosed debts
The first step when it comes to dealing with a deceased family member’s financial affairs involves letting their bank and any creditors know your mum/dad has passed away. The sooner you can do this following your parent’s death, the better.
Typically, upon receiving this information, banks and creditors will freeze any accounts that your parent had with them. They will then request details such as your parents’ full name, addresses, and any relevant account numbers to facilitate the process. Creditors will also usually request you send the deceased’s death certificate as soon as possible in order to formally close the account.
As discussed above, if you’re the executor on your parent’s account, at this point you should also search for any undisclosed debts. This should involve placing a Deceased Estates Notice and contacting potential creditors.
Check if there’s insurance
If your parent has life insurance policies in place, depending on the coverage, there is a chance these policies will pay off any outstanding debts without money needing to be taken from your parent’s estate. With this in mind, before using estate funds to pay off debts, it’s essential that you check if your parents have any insurance policies that may cover their liabilities. To do this, simply contact any insurance providers your parent had policies with and inquire about the coverage and procedures for making a claim.
It’s also important to check for mortgage protection insurance. If your deceased parent had one of these policies in place, the pay out may be able to pay off any outstanding mortgage balance on your parent’s property, alleviating what is typically one of the most significant debt obligations following an individual’s death.
Pay in priority order from estate
Once you’ve informed all creditors and checked for insurance policies, the final step involves actually paying off your parent’s debts using funds and assets from their estate. However, this is easier said than done. In the UK, debts need to be settled in priority order. This hierarchy of importance is outlined in the law.
Priority debts take precedence over any unsecured debts such as credit card balances or personal loans. This means money from your parent’s estate should go towards paying for funeral expenses, inheritance tax, and any secured debts, like the mortgage or car loans, before any unsecured debts are dealt with. With this in mind, it’s important that you work closely with the executor of the estate or seek legal advice to ensure debts are paid off correctly and in compliance with legal obligations.
As we explore in our guide on what happens to debt upon death, if your parent was using a debt management solution such as an Individual Voluntary Arrangement (IVA) at the time of their death, the arrangement will be terminated by the Insolvency Practitioner (IP). Just as with the debts listed above, creditors involved will then simply seek repayment from the deceased’s estate. If there is not enough funds to pay off all debts, so long as none of these debts are joint, they will typically be written-off.
Similarly, a Debt Management Plan (DMP) concludes with the death of the individual, with creditors pursuing remaining debts from the estate.
Dealing with the death of a parent can be incredibly difficult, and this can be made even harder if you have a complicated set of financial affairs to untangle and settle. To find out more about how debt and debt management solutions work after death, visit MoneyHelper to get free advice or alternatively get in touch with our experts today.
