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Tackling your debts

What happens to your debts when you die?

Posted 25 September 2015

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If you’re struggling with unmanageable debts, you might wonder what will happen to these if you die. Read our guide to learn more.

If you have debts, you may wonder what will happen to them following your death. Below, we look at what happens to your debts when you die; how this affects your estate and the impact this could have on your family.

Your debts don’t die with you

First thing’s first; if you die, your debts don’t automatically die with you. Instead, your borrowing is covered by your estate – and what you owe will be subtracted from this before anything goes to your friends and family (or other beneficiaries of your Will if you’ve made one).

This means that there’s no guarantee that cash or assets you hope will be passed on to your loved ones actually will be. For instance, if you leave your house to your children but have outstanding debt (and no savings), it may be that the property, or other assets, will need to be sold to cover these and your kids will get what’s left – which could be less than what you were hoping to leave them.

How your family is affected

In most cases, your family is not responsible for your debts, but they could still be affected if you die whilst in debt. The main reason for this is that money owed to your lenders is usually the first thing subtracted from your estate, before anything you have left to your friends and relatives in your Will.

Remember, your estate does not just include your house and any savings; it also includes other assets like your car and other valuable items. If you leave your car to one of your children, there’s a chance they won’t receive it as it may need to be sold to cover your debts.

However, while they could end up inheriting less than you had planned, your family will not be responsible for sorting out your debts and lenders are not allowed to chase them for it – unless the accounts are in joint names (more below).

Once as much of the debt as possible has been repaid from your estate, any remaining loans should be written off. It is possible that there may be very little of your estate left at the end of this. It might also mean there’s nothing left in the pot to cover your funeral costs.

Joint accounts

The exception to this rule is joint accounts. If you took out a loan or credit card jointly with someone else, when you die they could become solely responsible for repaying it.  Most joint credit agreements for unsecured borrowing (like loans) specify that you are “jointly and severally liable”.  This means that if you die the other person becomes responsible for the whole balance outstanding.

Joint credit agreements can be particularly troublesome if you own a home with someone. Unfortunately, there is a chance that if you do, and the rest of your estate does not cover the money you owe, the property will need to be sold to make it up.

It all comes down to the details of ownership on your property deeds – essentially, whether you and the other owner are ‘tenants in common’ or ‘beneficial joint tenants’. If you are the latter, then when you die your share of your home automatically becomes the property of the person you shared it with. However, if you are tenants in common, you each own a particular share of the property. This means that when you die, your share forms part of your estate, and so could be liable for lenders to claim against. This might mean your partner has to raise the money to cover your half, or sell the home to satisfy your lenders.

And even if you are beneficial joint tenants, there’s a chance this could change if your lenders choose to take action. If they are successful, ownership may change to ‘tenants in common’.

Of course, if only you own your home, it all becomes part of your estate. This means it may need to  be sold if you have large outstanding debts and little by way of savings.

What can you do?

If you have debts you’re worried about, you may feel relieved that your loved ones will not be burdened with them after you’re gone. However, the news that what they inherit could be substantially diminished might trouble you – so what can you do?

Debts that have become unmanageable can feel like a heavy load, particularly if you’re coping with them alone. It might therefore be worth looking for expert debt help and advice sooner rather than later.

You can get free debt advice from the Money Advice Service which is an independent service to help people manage their debts. Alternatively you can call one of our expert advisors on 0161 605 4810 and talk through your situation with them. They will be able to provide you with advice on where to go from here.

This might include detailing the debt solutions on offer – some of which fees are payable for – and which might be suitable for your circumstances. These range from debt management plans to DROs and bankruptcy and could help to make your debts easier to manage. Best of all, they might set you on a path towards getting back on top of your finances again.

 

By starting on the journey to getting in control of your money, you can begin planning the legacy you really want to leave behind you.

by Christine Walsh

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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.