Debts and the deceased person

Q: When someone dies, do their debts die with them, or if they owe money does it still have to come out of their estate when they die?

A: A lot of misunderstanding surrounds this issue, however, the simple answer is that debt's should be paid off by the deceased's estate.

The estate
Their 'estate' is the property, possessions, cash and any money they leave behind including money from insurance and investments. If someone dies their estate is handled by one or more executors, but if they did not leave a will it will be dealt with by an administrator. These are often a relative, friend or solicitor.

If the estate is worth above a certain amount the executor or administrator will need authority - referred to as 'probate' or 'letters of administration' to be able to handle the person's affairs. This includes paying off their debts, and should be done in this order: funeral costs, death taxes, secured debts, and finally, unsecured debts, for example credit cards.

The estate has to pay off any outstanding debts in priority order before anything can be given to anyone named in the will, or until the money runs out. If the deceased estate is not large enough to cover the debts - if, for example, they had no assets or savings – lenders cannot make a claim on it. They cannot claim from relatives either, including a husband, wife or civil partner. You are only responsible for their debts if you had a joint loan or agreement or provided a loan guarantee.

It is worth checking whether there is any insurance that may cover a deceased person's debts. For example, deathcover for a mortgage, death in service from a pension (if the persons dies before pension age a lump sum may be paid), payment protection cover on personal loans and credit cards.

Your home
If you own a property in joint names you may have to sell it if there is insufficient money elsewhere to pay off the deceased person's death. This may be avoided but it depends on whether you owned it as joint tenants or tenants in common.

If you are a joint tenant the deceased person's share passed automatically to you. Although it now becomes part of your estate, you should not ignore the debt. Creditors can apply for an Insolvency Administration Order within five years of the death, in effect dividing the property in two and forcing a sale. It is better to try to reach an agreement with them and try to pay off the debt.

Tenants in common own a specific share of the property, and the share belonging to the deceased person forms part of their estate and goes to whoever is mentioned in their will. If there are any debts these must first be paid from that share. If you want to avoid a forced sale, you and any beneficiaries should try to negotiate with the creditor and pay off the debt.

Paying different debts

• Mortgages - life insurance may pay off the full loan, but if there wasn't any, or if there were second mortgages not covered by insurance then the property may have top be sold
• Rent arrears - the joint tenant must pay off any rent arrears
• Water rates - anyone living in the property is responsible for the arrears and ongoing charges even if their name is not on the bill
• Council tax - anyone living in the house is responsible for any arrears and ongoing charged even if their name is not on the bill. A 25 per cent discount is available for sole occupants. There is usually no charge if the property is empty
• Fuel bills - you may be liable if you have been living in the property jointly
• Hire purchase agreements - the buyer only owns the goods when the last payment is made. If over a third has been paid then the seller needs a court order to get the goods back. Check to see if a payment protection was set up before returning goods or making payments
• Personal loans and credit cards - these must wait until priority debts have been paid. If cards are held jointly then the debt is the joint holder's responsibility. Check for any payment protection plan.
• Tax debts and overpaid benefits - these must be paid out of the estate. It is best to contact the relevant offices quickly to prevent overpayments and check if tax is owed.

Where to get help and advice

• National debtline www.nationaldebtline.co.uk
• Wandsworth Advice Services www.wandsworthcabx.org.uk
• Consumer Credit Counselling Service www.cccs.co.uk
• Age Concern www.ageconcernwandsworth.org.uk