The death of a loved one is difficult enough at the best of times, but it’s fair to say that this scenario can be made harder by the spectre of debt.
After all, in instances where people die and leave debt, creditors have numerous ways through which they can recoup their money. The way in which such liabilities are settled also depends on a number of different factors, and it’s important to understand these in detail when managing a loved one’s estate.
In this post, we’ll look at what happens to the debts of the deceased, whilst considering the circumstances in which you may be required to pay.
What Happens to Debt when the Debtor Dies?
In legal terms, an individual’s outstanding debts become a liability on their estate in the event of their death.
In this instance, the named executor of the estate (or the administrator if no Will has been left by the deceased) bears the responsibility for settling these debts wherever possible.
OK, but what happens if there’s insufficient money or assets in the estate to settle the outstanding debts? In this case, the debts are paid in priority order until there’s no money left, with any remaining liabilities likely to be written off completely.
Do Surviving Relatives Ever Have to Settle Outstanding Debts?
As we can see, it’s the responsibility of an executor or administrator to pay off the deceased’s debts.
However, it’s rare for executors to be held personally liable for any debts of the estate, although there are some exceptions to this rule in the case of large or particularly complex estates.
As for surviving relatives, they won’t generally be responsible for paying off individual debts that are solely in the name of the deceased. This type of debt includes personal loans and credit cards, and the only exception to this rule is if a relative has acted as a guarantor as part of a particular agreement.
Of course, if the deceased’s spouse has co-signed on a joint application for a loan or a finance agreement, they’re liable for the full amount of money that has yet to be repaid to the lender.
Unsecured vs. Secured Debts
Your responsibilities will also vary depending on whether the outstanding debts in question are secured or unsecured.
In the case of unsecured debts, creditors will generally have to wait until the priority accounts (such as mortgages) have been settled before they can begin to pursue the amount that they’re owed.
In instances where the debt is solely in the name of the deceased and remains outstanding once the estate has been drained of funds, creditors will need to write off the debt and have no further course of action.
Things can get a little more complicated in the event of secured debts, not least because the relevant assets can be seized in instances where the deceased has missed payments prior to their death.
In the case of real estate, the ownership structure of a particular property also impacts on what happens in the event of a death. If your partner died and you were classed as tenants in common, for example, the deceased’s share of the property can be taken into account when settling debts.
However, if you were classed as joint tenants, the deceased’s share of the property passes directly to you. This means that the property cannot form part of the estate or be considered when settling outstanding debts.
The Last Word
Whether you’re the executor of an estate or had entered into various credit agreements with the deceased, it’s important that you understand your legal requirements in relation to any outstanding debts.
It’s also worth determining the value of assets such as real estate, whilst also identifying the precise ownership structure and the outstanding amount that’s owed to the creditor in question.
You should also take the time to clarify the ownership structure of specific assets if you’re ensure, as this will prevent any nasty surprises when attending a Will reading or dealing directly with an administrator.