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Do debts die with you?

Posted 29 October 2015

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If you’re struggling with problem debt, could your family have to handle it once you’re gone?

Most of us have got some borrowed money these days, even those of us who are a little nearer our golden years. Whether it’s a mortgage with a few years to run, a credit card or personal loan, do you know what happens to what you owe if you die? Does it disappear? Does it pass on to your kids, you wife or husband, or your partner?

Before borrowing money, especially over a long term (like a mortgage), it’s good to know what would happen if you were to die – even though we understand it may not be something that you want to think about.

If your partner or a loved one has died and you feel like you need support with sorting their affairs out, you can find free help on all things related to the death of a loved one, including registering a death, probate and legal issues and coping with grief, at the bereavement advice centre

Who pays your debts when you die? 

Whilst we’ve written this blog mainly for our more elderly readers, we are more than aware that people sometimes die unexpectedly and they can be young when this happens. So the advice we’ve given for the more mature section of our readership is also applies to the younger ones among you too. Right, let’s get on.

Debts in your name only

If you owe money when you die then the remaining balance is paid out of the money left in your estate. Your estate is any asset or property you own, this includes your house, your car and any personal items of value you may have.

As your outstanding debts can include your mortgage and any personal loans you have, both of which could be substantial amounts, you may have much less to leave to your family than you thought you would. This will be more applicable to those who die younger, as you’re more likely to have a bigger proportion left to pay. 

If your estate doesn’t cover all the debts you have outstanding at the time of your death (this is called having an insolvent estate) any leftover unsecured debt is written off. Thankfully, the lenders that you borrowed from will not be able to chase your family for the debts once you’re gone, if they are on your name only. So that’s one things you don’t have to worry about.

The situation with secured debts is a bit different – this is typically things like cars on hire purchase and, of course, your property if it is mortgaged.  If there isn’t enough money in the estate to clear these debts then the lender has the right to repossess the property.

Do you have life insurance?

Usually when you take out a mortgage or other large secured borrowing and you have dependants, such as your partner and your children (but possibly also including elderly parents) you’ll be advised to take out a life insurance policy too. This is so if you die leaving dependants they can use the lump sum pay out to clear the remaining mortgage, allowing them to continue to live in the home mortgage free.  Check to see if you have one of these, or any other policy that would pay out a lump-sum on your death.

If don’t already have a will, but you’d like to make one – here’s how to do it

What happens if the debts are joint?

If you borrowed money in joint names, if you die the liability for the full remaining balance usually passes to the other person named on the original document. We’ll assume that the other person is your partner or wife, as secured debts are usually things like your mortgage, homeowner loans or cars on hire purchase, which are often bought with a partners or spouses. However, it’s likely that your partner will already know that they are going to be liable if you die, because they’ll have had to sign the credit agreement, as well as you.  

What about inheritance tax?

The first thing to note about inheritance tax is that it does not apply to anything you leave to your husband or wife. So what we’re talking about here is anything you want to leave to other members of your family or, probably the most likely scenario, your kids or grandchildren. 

If you are in the position of having an estate that’s worth over £325,000, you’ll have to pay 40% inheritance tax on anything you want to leave to your family. It may seem a lot, but remember, this figure includes your house, car, and anything else you own too. The amount you’ll have to pay in inheritance tax will be deducted after your outstanding debts have been paid.

And, if you think you’ll get out of inheritance tax by giving your assets away before you die, bear in mind that anything you give in the seven years prior to your death will be subject to inheritance tax anyway. 

We hope this has given you more of an idea about what happens to your debts when you die. However, if you still feel like you need help, we are ready and waiting to take your call. Just use one of the ‘contact us’ links on the left of the page for free, no obligation advice on all aspects of debt.  

by Shelley Bowers

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.