It’s common knowledge that debt can act as a huge weight on an individual’s shoulders during their lifetime. However, have you ever stopped to think about the stress attached to understanding what happens to your debt once you’ve passed away.
Thinking about your loved ones dealing with your debts after you’ve died is never a nice thought. However, it’s an important topic and one that should be discussed and clearly understood if you’re struggling with debt.
With different types of debt treated in different ways on the death of the debtor in question, knowing what your family and loved ones may be left to deal with is not always straightforward. For this reason, understanding the fate of posthumous debt is crucial for both individuals and their loved ones.
In this guide, we answer a range of common questions relating to this topic and provide clarity for those worrying about what will happen to their debt once they are no longer around.
What happens to your debt when you die?
From credit card debt to joint liabilities and formal arrangements like Individual Voluntary Arrangements (IVAs), the handling of debt and debt management solutions after death varies depending on various factors and legal frameworks. Below we take a look at a number of different types of debt and explore which, if any, are forgiven after death in the UK.
What happens to my credit card debt when I die?
As of 2023, credit card debt is the most common type of debt people in the UK face. However, what happens to this debt upon death depends on several factors, including whether the debt is solely in the deceased’s name or jointly held.
If the credit card debt in question is solely in the deceased’s name at the time of their death, it will typically become the responsibility of their estate. This is to say, the executor or administrator of the estate is tasked with settling these outstanding debts using the funds and assets left behind.
These assets can include property, land, personal possessions and money in bank accounts. When doing this, it’s important to also consider potential undisclosed debts. As the name suggests, these are debts attached to the deceased that you know nothing about. To avoid potential complications, consider advertising in a local newspaper before settling the deceased’s debts.
This provides creditors an opportunity to assert any claims they may have. Although not legally required, failing to place a Deceased Estates Notice could expose you to personal liability if a creditor emerges after the estate is distributed. It’s advisable to allow at least two months from the advertisement date for potential claims on the estate to be submitted. Once that is done, if the estate holds insufficient funds to cover the debt, the creditor may choose to write off the remaining balance.
In the UK, credit card debt cannot be passed on to family members. As long as the debt is solely in the deceased’s name, the family of the deceased are not directly accountable for the unpaid debts. Only their potential inheritance can be impacted. However, this is not the case when it comes to joint credit card debts.
What happens to joint debt when a partner dies?
If you have joint debt at the time of your passing, such as mortgages or loans taken out by partners or spouses, typically the surviving partner is still responsible for paying off the debt. Similarly, if any debts had a guarantor, this guarantor will become solely liable for the debt in question.
This is to say, regardless of who incurred the debt or who contributed to the repayments, if a surviving individual is named as a joint debtor on the account, or there is a surviving guarantor listed on the account, they are still liable.
Indeed, if the surviving partner or guarantor is unable to repay the debt on their own, the creditor can pursue legal action to recover the outstanding amount. Depending on the terms of the agreement, some creditors may also have the authority to recover the debt from the deceased’s estate if there are sufficient assets to cover it.
If you’re joint tenants, it’s important to note that your home doesn’t form part of your estate when you die. With this in mind, after the death of a partner, the surviving tenant will typically receive the deceased’s share of the property. However, this means taking on more of the financial responsibility attached to the property as a result.
What debts are forgiven at death in the UK?
It is very unusual for a debt to be totally forgiven at death in the UK. However, as we’ve looked at above, some types of debt can technically be discharged depending on the circumstances.
Usually debts need to be settled in priority order upon death. Secured debts like mortgages are paid first, followed by priority debts and then unsecured debts – all from money recovered from the estate. Priority debts include taxes and funeral expenses.
If the estate of the deceased doesn’t contain enough funds to cover these debts, any remaining balances will be paid off in priority order until the money or assets in the estate run out. After this point, any remaining unpaid debts may well be written off by the creditor. Similarly, if no estate is left by the deceased, and there is no funds or saleable assets to pay off debts, they will typically be written off.
In this situation, unless debts are joint or someone is named as a guarantor on a credit agreement, nobody other than the deceased can be held responsible for repaying the debts. This means the debts die with the individual. While this is not the same as being forgiven, this outcome for your surviving family members remains the same.
It’s also worth noting that if the deceased had certain types of insurance policies—such as life insurance with a clause for debt repayment—these policies may be used to settle outstanding debts.
What happens to an IVA on death?
Put simply, if an individual dies while in an IVA, the IVA would be terminated by your Insolvency Practitioner (IP). Any creditors involved would then claim against the individual’s estate.
As stated above, if there was not enough money or valuable assets remaining in the estate to clear the debt, and you have checked for undisclosed debts, it will typically be written off at this point. Alternatively, if the deceased individual had taken out life insurance with a clause to cover outstanding debts—including those covered by the IVA—debts may be cleared by these policies.
What happens to a DMP on death?
When an individual in the middle of a Debt Management Plan (DMP) passes away, the plan typically ends. As is the case with an IVA, any remaining debts may be pursued by the creditors through the deceased’s estate.
If, on the other hand, the deceased had a joint DMP, the responsibility for repayment usually falls on the surviving joint applicant. However, it is worth noting that in this situation creditors may review the circumstances and agree to waive any outstanding debt or negotiate new terms. It’s advisable for family members or the executor of the estate to inform creditors promptly and seek professional advice to handle outstanding debts and financial matters appropriately.
Understanding the fate of debt after death is essential not only for putting your financial affairs in order in later life, but also to give you peace of mind. To learn more about what happens to your finances or debt management solutions after death, visit MoneyHelper to get free advice or alternatively get in touch with our experts today.
