Debts of the Estate
The question of what happens to debts when someone dies is the subject of more confusion on the Internet than possibly any other topic related to probate.
Firstly, it is important to understand that all debts owed by the deceased, whether jointly or solely, ultimately have to be repaid. The only exception to this is where the value of debts in the sole name of the deceased exceeds the total value of the deceased’s assets and share in joint assets. In other words if the estate is insolvent this is equivalent to bankruptcy and creditors will not receive all of their money. In this case there will be nothing to distribute to beneficiaries.
A debt in the deceased’s sole name such as an overdrawn bank account or a car loan will always have to be paid from the estate’s assets. If there are sufficient assets in the deceased’s sole name, or held as Tenant in Common, then the executor or administrator will arrange for the debts to be paid out of the proceeds from these assets.
If there are not enough assets in the deceased’s sole name then the debts will be payable out of joint assets held as Joint Tenants. The Personal Representative cannot force the other Joint Tenant to pay these debts. It would be normal, however, for the Personal Representative to be involved. Ultimately the creditors can apply to the count for an Insolvency Administration Order (within 5 years) against the other Joint Tenants to force the sale of the joint asset and the repayment of the debt.
Joint debts might be subject to a written agreement, as will be the case with loans for instance, but they will invariably entail “joint and several liability”. This means that on the death of one debtor the debt becomes the sole responsibility of the other joint debtor. The debt is accounted for in Inheritance Tax calculations but does not form part of the estate for probate purposes and is not repaid by the Personal Representative out of sole assets.
Household debts such as council tax and water rates are joint debts and become the responsibility of the other householders even if their names do not appear on any documents.
Joint credit cards
On Internet probate and debt forums you will find a lot of conflicting advice about joint credit cards. In the UK credit can only be offered to individuals so credit cards are never held jointly. The confusion on the Internet arises because joint credit cards are legal in America and several American sites give the impression of being UK advice sites (“.co.uk”) but actually are largely just mirror sites. The confusion is so widespread that even the UK Government website mentions joint cards.
In the UK one person is always responsible for the debt on a credit card and is known as the Primary Cardholder. If there are more individuals authorised to use the card they are known as “secondary cardholders” and they have no liability for the debt on the credit card, even though their name will be on a card and they have used it to buy goods.
You will probably need to find a statement or original agreement to tell whose name the card was in.
If the deceased was the primary cardholder
You should look for evidence of a Payment Protection Policy which may clear the credit card balance in the event of death.
You should be aware that “continuous authority” payments are possible on credit cards – the equivalent of Direct Debits. You should check twelve months’ statements for these because they will be cancelled as soon as the credit card provider is informed.
You should write to the provider, ask for the account to be closed and the balance frozen, request a closing balance and either return all cards or confirm they have been destroyed. Although you have asked for the balance to be frozen it may continue to attract interest which the estate will be responsible for. Some credit card providers will offer a short interest free period following notification of death. For instance Barclaycard Mastercard will allow an outstanding debt for three months before applying charges. You may want to pay off the balance on any cards which continue to accrue interest as soon as possible.
If the deceased was a secondary cardholder
Write to the provider and request that the deceased’s name is removed from the account. The Primary Cardholder can continue to use the card and is responsible for all debts on the card. None of the debts are the responsibility of the deceased’s estate.
Charge cards are not covered by the Consumer Credit Act 1974 because they must be paid in full at the end of each month.
American Express – Supplementary cardholders are jointly responsible with the main cardholder only for the charges incurred by the supplementary cardholder. This means that part of the debt owed on an American Express card could be the responsibility of the deceased’s estate and part could pass to the supplementary cardholder.
Diners Card – The main cardholder is responsible for all debts, including those incurred by any supplementary cardholders.
Mortgages & Other Debts
It is important to establish if there is a mortgage on the property. This should be evident from a review of bank statements as there will be a monthly payment. Mortgages are often covered by life insurance on the lives of those parties to the mortgage. If a life insurance policy cannot be located try the mortgage provider or check the bank statements for monthly premiums being paid. If life insurance is identified notify the life company as soon as possible of the death of the insured and send a copy of the death certificate. If there is no life cover the debt will still have to be repaid.
If the property is owned as joint tenants (which most properties are) any debts on the property will pass to the surviving owner and if they cannot be settled it may be necessary to sell the property. If the property is owned as tenants in common then the deceased’s share will pass to another party but this can only happen once their share of any debts has been settled.
Debts that the deceased had at the date of their death form part of their estate. With joint loans the surviving party takes over all of the value of the loan. Surviving spouses and civil partners are not however responsible for the debts of the deceased unless they were joint loans.
You will need to inform the lender of the death of the deceased as soon as possible to stop repayments being chased. This can be done by letter with a copy of the death certificate. Check with the lender whether there is any payment protection cover in the event of death which will settle any outstanding liability.
All debts must be repaid out of the estate before the beneficiaries of the will receive anything. If there are insufficient funds in the estate to settle the debts then no payments can be made to the beneficiaries. If there are insufficient funds and any property is jointly owned with the deceased then the surviving owner can be liable for debts of the deceased.
If the property is owned under a joint tenancy it passes automatically on the death of the deceased to the other party. However creditors of the estate can apply for an Insolvency Administration Order within 5 years of the death, forcing the surviving party to sell the property and make funds available from the deceased’s share.
If the property is owned as tenants in common and there are insufficient funds, a sale of the property may be unavoidable to liquidate the deceased’s share of the property. For the reasons above it is always worth trying to negotiate with any creditors to avoid this.
There is an anomaly with one particular debt that the deceased may owe. On death any loans outstanding to the Student Loan Company are waived and are not therefore included in the estate of the deceased. They also do not pass to the surviving partner. You will need to write to the Student Loans Company with a copy of the death certificate.