Who deals with outstanding debt after a death?
If you are considering taking out a personal loan later in life, unfortunately you may need to consider the question: What happens to my personal loan if I die? Who deals with remaining debt depends on whether the debt was in the borrower’s name only or was taken out on a joint basis.
If the loan debt is in their name only
If the loan was in the borrower’s name only, then it will fall to the executor or administrator of the will to pay it off. This doesn’t mean the executor pays the debt out of their own pocket, instead they use any assets left by the deceased. However, there are some exceptions to this rule, so make sure you fully understand the legal role of an executor before taking on that responsibility.
If you are considering becoming the administrator of a will and have no legal background you might want to consider seeking a solicitor’s or lawyer’s advice – particularly if the estate is a large or complicated one.
It’s important to note that if your loved one left unpaid debt in their name only, you won’t have to pay it off out of your own pocket. It is possible that any inheritance will be used to clear their debt, before the remainder is given to any beneficiaries.
If the loan debt is joint with you or somebody else
If the loan was taken out as joint debt, then the other person on the credit agreement will need to pay off the remainder of the debt. If you are a guarantor on a personal loan you will become liable for the full remaining debt if the borrower dies. Other instances of joint debt include joint current accounts with an overdraft, and a joint mortgage.
For example, if you and your partner took out a joint mortgage and the mortgage wasn’t paid off when your partner died, you become solely responsible for paying it off.
Credit cards only have one name attached to them, but the deceased may have taken out a second card for their partner or spouse to use. The person with the second card is called the second cardholder and is not responsible for paying debts on that credit card, even in event of the account holder’s death.
How to repay loan debts after death
If the worst was to happen, there are five simple steps you will need to follow if you are obliged to pay off a debt after the borrower has died:
1. Tell the creditors that the borrower has passed away
It’s important that you notify the creditors as soon as you can after the borrower has died. Otherwise, they will carry on expecting payments as normal. If there's a delay in payments they may think that the borrower has just stopped paying and they may take further action. Once you tell them the borrower has died, they should give you space to sort out the estate.
2. Request information on the debt from the creditors
Ask the creditor(s) for a statement of the full amount of outstanding debt. You can also ask them to stop taking any payments from the deceased’s bank accounts if the debt is individual. Or, you can also ask them to take the deceased’s name off the credit agreement if the debt is joint.
3. Find out if the borrower took out insurance on the debt
If so, you may be able to use the insurance to pay off the debt. Make sure you read the teams and conditions of the insurance policy carefully to check whether it covers the debt, before making a claim.
4. If there's no insurance, see if the creditors have made a claim on the estate
For individual debt, the creditors will need to be given contact details for the executor or administrator of the estate. The administrator will need to have a grant of administration or probate. For joint debt, you should check the terms and conditions with your creditor. You may be expected to carry on making payments as normal.
5. Pay off the debt in order of priority
First it's important to cover the funeral expenses and administration costs for the estate. Then you should pay any debts which you are liable for and aren’t covered by insurance before paying out any inheritance. The debts will need to be paid in this order: Firstly, secured debts, for example, mortgage repayments. Secondly, priority debts, for example, council tax. Finally, unsecured debts, for example unsecured personal loans.
How does the deceased’s estate factor into repayments?
The estate of a deceased person includes their money, possessions and any property or land they owned. That estate is first used to cover funeral and administration costs, then any assets left over are used to pay off any debts in order of priority.
If there are assets left after the debts have been paid in full, they will go to the benefactors of the will or, if there is no will, the deceased’s nearest relations. If the assets don’t cover all of the debts, then the remainder of the debts will likely be written off (if they are in the deceased’s name only). Any joint debts will become the responsibility of the whoever else is on the account.
What if I’m unable to make repayments on inherited loan debt?
If you’ve inherited joint debt and you’re worried about paying it off, don't worry, get in touch with the credit provider.
You may be able to negotiate repayments to a more manageable amount. Just remember that lower payments will mean the debt takes longer to pay off and it could affect your credit score. You can also seek free, confidential advice from a debt charity like StepChange.