Myth: All your debts will be written off when you die
Mortgages, loans, credit cards, car finance…..whatever the debt, there’s a myth where people think their debts are written off when they die. But that’s not the case. Any assets you had before your death, including any properties, savings and valuables, such as jewellery, car, etc, will be used to pay off any outstanding debts. Your partner, children and family or anyone else you’ve left your estate to, won’t get a penny until all of that debt has been paid. This is the case whether or not you have made a Will.
If you die and have no assets of any value, then your debts do die with you as they cannot be repaid. Your family and loved ones do not have to pay off your debts unless they have provided personal guarantees for those debts. Your creditors can sue your estate for the payment of outstanding debts.
If the estate’s worth is above a certain amount (this can vary depending on the circumstances) the executor or administrator will need special permission – called ‘Grant of Probate’ (if there’s a will) or ‘Letters of Administration’ (if there’s no will) – to be able to deal with the person’s affairs. This includes gathering in any assets and paying off their debts. There may be life assurance, or death in service benefit from employers, which can be used to pay off debts, such as a mortgage.
Whatever assets you do have will be cashed in or sold and used to pay off your debts in the following order of priority:
- Funeral, testamentary and administration expenses. Testamentary and administration expenses are the expenses incurred in dealing with your death estate
- Creditors who have security, for example, mortgage providers
- Preferential debts – these are mainly taxes and social insurance contributions
- Ordinary debts, for example personal loans or credit cards
There are four classes of creditors in the above priority structure. If, for example, there are enough assets in the estate to pay all of the expenses, secured creditors and preferential debts but not enough to pay all of the ordinary debts, your personal representative can chose which ordinary debt to pay first. However, usually it is advisable to repay a proportionate amount of each debt.
If you have no assets then payment of debts does not arise.
Jointly owned assets
In simple terms, any assets held in joint names, such as property or bank account, will pass automatically to the survivor. However, this does not apply to all property (eg if held as Tenants in Common), and it may be possible for creditors to chase outstanding property debt from the surviving partner.
For more information on estate planning and what to include when making a Will, contact Jenny Fothergill.