What happens to your debt when you die?

At a glance

• Your estate is used to repay your debts after you die.
• An insolvent estate is when you have more debts than the value of your estate.
• Some debts may be written off, but secured debt such as a mortgage will need to be repaid.

It’s never nice to think about a time when you’re not going to be around, but much like the need to consider life insurance so your family are financially protected in the event of your death, it’s important to consider what will happen to your debt as well.

Here we take a closer look at what will happen to outstanding mortgage debt and any loans, credit cards and similar unsecured credit agreements you have, and how you can prepare accordingly.

What happens to your debt when you die?

When you die, your estate will be used to repay any debts you leave behind. Depending on how much debt you have and the value of your estate, this means that there may not be much left over in the way of inheritance, so it’s important to factor this into any estate planning scenarios and consider if you may need a larger life insurance policy to ensure you’re leaving something behind.

What is the order of priority of paying debts after death?

The first priority will be repaying the mortgage or any other secured debts (though this may be covered by an insurance policy or sale of the property).

Next are any priority debts, which can include income or council tax, and finally unsecured debts, including credit cards, utility bills and unsecured loans. Note that funeral and administration costs will need to be paid by the estate as well, and these will normally be dealt with after the mortgage has been repaid.

What if there’s no estate?

If you don’t have an estate, or if you leave behind more debt than your estate is worth, it becomes known as an ‘insolvent estate’. In this case, any debts will typically be paid on a pro-rata basis, with the largest lender receiving the largest share. Debts will still need to be paid in order of priority until the money runs out, with anything remaining written off.

If you leave behind a hefty mortgage balance, your family may still need to cover the outstanding debt in some way, even if it means selling the property to repay it. This means seeking advice ahead of time is essential, as is ensuring you’ve got suitable protection policies in place. Read more about the importance of financial advice and how to get it so you can be confident your family will be financially secure after you’ve gone.

Can you inherit debt?

This depends on the type of debt. Individual debts – debts that are solely in the deceased’s name, such as credit cards or personal loans – won’t be passed on, and you as a beneficiary won’t inherit it. This means that if there isn’t enough money in the estate to cover them, they’ll be written off.

What about joint debt?

Joint debts, on the other hand, can be inherited. If you took out any form of credit in joint names, or you acted as a guarantor for the deceased, you’re still liable for the debt and will likely be responsible for repaying it, unless any insurance policies were taken out to cover the outstanding amount. This applies to things like joint mortgages but also joint bank accounts (and associated overdrafts) and loans that are in joint names. In these cases, you as the surviving borrower will be expected to repay the debt.

What happens to credit card debt when you die?

Credit cards, loans and similar credit agreements all count as examples of individual debt, so any unpaid balances will need to be paid out of the estate. If there aren’t sufficient assets to cover them, they’ll be written off – though as mentioned, the exception to this is if they’re in a joint name or someone has acted as a guarantor.

What happens to your mortgage when you die?

Your mortgage is likely the largest form of debt you have, so it’s natural to want to make sure that your family isn’t left to cover the cost, particularly if you’re the breadwinner. In this scenario, the mortgage will ideally be paid off via the proceeds from your estate and/or through any life insurance policies, or if this isn’t the case then the repayments will hopefully be met (at least in the short-term) by any mortgage protection policies you have in place.

If there isn’t enough money to cover the mortgage and/or you don’t have suitable protection, your partner may be able to take out a mortgage in their sole name. However, they’ll need to undergo a full affordability assessment, which may mean they won’t qualify for the required amount. In this case, there’s the chance that the home will need to be sold to repay the debt, highlighting why you need life insurance when taking out a mortgage.

However, things can get a little complicated depending on who’s named on the mortgage and whether you’re ‘joint tenants’ or ‘tenants in common’. This is just one of the reasons that it’s important to seek suitable financial advice before the time comes, so all parties can know what to expect.

You can get a free one-hour consultation from our preferred financial planning advice firm Kellands Hale (subject to min. investments of £100,000), or search on Unbiased.co.uk to compare advisers near you.

What happens to other secured debt when you die?

The same kind of rules apply to other kinds of secured debt, such as secured loans or second-charge mortgages and even things like car finance loans – the debt will need to be repaid, either through any insurance policies in place, the value of the estate or sale of the asset. However, things are slightly different when it comes to lifetime mortgages.

If the lifetime mortgage is in your sole name, then the property will be sold and the proceeds used to pay off the debt. If the mortgage was taken with another person who is still alive, then it will continue until either they die or go into long-term care. Either way, when a property is sold to repay a lifetime mortgage, any remaining funds will go to the estate.

Lifetime mortgage lenders that are members of the Equity Release Council guarantee that the amount to be repaid will never exceed the value of the property. This means your beneficiaries will avoid negative equity. Find out more by speaking to our preferred equity release adviser Mortgage Advice Bureau Later Life.

What happens to student loans when you die?

If someone has an unpaid student loan when they pass away, the loan will be automatically cancelled – no-one else is responsible for repaying the debt, and it doesn’t need to come out of the estate. The Student Loans Company (SLC) must be informed and provided with the death certificate and the deceased’s details for the cancellation to be processed.

Does life insurance pay off your debts?

This will depend on the type and amount of life insurance taken out, but it will ideally cover most if not all debts left behind, without needing to eat into the value of your estate or leaving any joint borrowers responsible for the debt. Just make sure to check that you’re covered for a large enough amount, and update your policies should you take on additional debt at any point.

How to deal with debts after someone has died

It can be a highly stressful and emotional time, but it’s important to deal with any debt left behind as soon as possible. Start by looking through the deceased’s paperwork and make a list of their accounts, debts and any insurance policies they have, and from there you can notify the creditors and make a claim for any insurance payouts.

You should place a notice in The Gazette, the UK’s public record of legal notices, and ideally in the local paper of the deceased. These let creditors know they can make a claim against the estate; if you don’t place a notice and creditors you weren’t aware of came forward at a later date, you may be responsible for covering the amount owed.

Seeking advice and support could be invaluable during this period. Here are a few organisations you may like to contact:

• National Debtline
• Money Helper
• Citizens Advice