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When a loved one dies, dealing with their debts can make a difficult time even harder.
You might be worrying about whether you will inherit debt from a parent who is in debt right now. Or perhaps you’re in debt yourself, and worried about leaving it behind for your own partner and children.
Whatever the situation, it’s important that you understand your rights and responsibilities, and how to get advice if you need it. In today’s blog we’re sorting the myth from the facts.
Inheriting debt from your parents: myths vs fact
Myth 1: when someone dies, their debts automatically die with them.
Myth 2: adult children can inherit debt from their parents.
Myth 3: a parent’s debt can affect their children’s credit scores.
None of these things are true! As is so often the case, the truth is a little more complicated.
Your parents’ finances do not affect your credit score, unless you are financially linked to them by joint debts.
And most debts do not disappear when the person who owes the debt dies. (There are a very small number of exceptions to this, such as student loans.) But you can’t inherit debt from your parents or from anybody else.
Instead, when someone dies, the debts for which they were solely responsible are recoverable from their estate. The ‘estate’ refers to the money or assets they left behind when they died. This means that the estate cannot be divided out between beneficiaries until the debts are settled – and, of course, it means that if the deceased person left you a legacy in their will, you may not receive all of it.
The executor (or administrator if no will has been left) is responsible for paying any outstanding debts. This doesn’t usually mean that the executor is personally responsible for the debt.
What do I do if my parent dies owing money?
If you are the executor of your parent’s will, you need to list everything they owed, and to whom. To do this, you will need to go through all their paperwork and bank statements.
You can also place an advert in a local newspaper and in an official public record called The Gazette. This is called a Deceased Estates Notice. Posting this Notice will give any other creditors time to come forward. It helps you avoid personal liability for any additional debts that come to light in the long term. A solicitor or probate specialist may be able to give you more advice.
Contact the creditors you’re aware of to let them know that the person has died. Ask the creditors to send you details of the outstanding balance. Also check whether any payment protection insurance (PPI) policies are in place. If there is a PPI policy with life cover, this could pay off some of the remaining debt.
You must also establish whether these were individual debts, or owed jointly with someone else. Anyone who was ‘jointly and severally liable’ for any of the debts will now be wholly liable for the remaining balance. This also applies to guarantors. Make sure to check the credit agreement to confirm this.
Common joint debts include mortgages and overdrafts on joint bank accounts. If a surviving partner will struggle to repay the debt on their own, help them seek advice straightaway.
Any individual debts, such as the balance of a personal credit card, must be paid from the estate. You must pay these in a specific order: secured debts before the funeral costs; then priority debts such as income tax and council tax; and then unsecured debts.
What if there isn’t enough in the estate to pay off all the debts?
Then you will need to pay the debts in priority order until the money or assets run out. Creditors are likely to write off any remaining debts. You may need advice from a probate specialist.
If the person who has passed away left no assets or money to pay off their debts, then their individual debts will indeed usually die with them.
Life insurance policies usually pay out to a nominated beneficiary. This payment is therefore not treated as part of the estate. However, in some cases there may not be a living beneficiary. You could then pay the life insurance proceeds towards outstanding debts. This will depend on the terms and conditions of the policy.
Was your parent in a nursing home or other residential care before their death? If so you should check whether there are any fees that need to be paid from their estate. You can find more information about nursing home fees on the Age UK website. (Also check out their advice about estate planning, if you or a parent are thinking about making a will now.)
What should I do if I’m struggling with debt?
You know now that you can’t inherit debt from your parents. But maybe you or a parent are struggling to pay off joint debts after someone has died. Maybe the drop in income has made it harder to cope with existing debts. Or maybe you’re in debt now, and worried about leaving it for your partner or children to deal with.
Many people find it difficult to talk about death, and about money – especially if they’re in debt. But talking can prevent a problem getting out of hand; and it’s the first step to getting some help. So try to be as open with your loved ones as you can.
No matter how bad you think your debts are, you’re not alone – and there is a solution for you. If you’re worried about an older person in financial difficulty, you can find useful information and links on our blog. And our debt advisers can provide expert, sensitive help to you or anyone else who is struggling with problem debt. Get expert debt advice today.
by Christine WalshBack to blog home