Do Debts Have to Be Repaid after Death?
03 October 2018
In short, yes. When someone dies, their debts do not die with them and these will still need to be repaid. The person responsible for administering the Estate (known as the Executor or the Administrator) will be responsible for ensuring that these debts are identified, paid correctly, and paid in the correct order.
If the Executor or Administrator of the Estate fails to deal with outstanding debts correctly, they could be held personally liable.
Common Debts in Probate
Some of the most common debts that we see during the Probate process include:
- Mortgages on properties
- Utility bills
- Phone bills
- Credit cards
- Overpaid benefits or state pensions
- Income Tax bills
The funeral bill can also be classed as a debt of the Estate, as the Estate will be liable for paying the funeral costs.
However, these are just an example and there could be other debts held in the deceased's name. It's important that reasonable steps are taken to identify all of the debts of the Estate and to notify creditors of the death.
Any outstanding debts will need to be repaid in full before the remaining Estate can be distributed to the Beneficiaries.
How to Deal with Estate Debts
If you are the Executor or Administrator of the Estate, you will need to identify what debts the deceased had. This might require you to contact their utility providers, their bank and their mortgage provider, amongst others, to request up to date statements and final bills.
There is also the option for Executors and Administrators to place a statutory advertisement of the death in the Gazette, as well as in the paper local to where the deceased owned a property. This gives creditors the opportunity to find out about the death and make a claim to the Estate.
Once all of the deceased's debts, including the funeral account, have been identified, they should be added up to calculate the full amount owed by the Estate. This figure can then be deducted from the value of the Estate for Inheritance Tax purposes.
Paying Off Debts
As assets are sold and money comes into the Estate, the Executor or Administrator should begin paying these debts off.
There is a strict order of priority for paying off Estate debts and it's important that this is adhered to and debts are settled in the correct order.
Secured debts can be paid from the asset over which the debt is secured. An example of this would be a mortgage secured against the deceased's property.
First, the funeral expenses must be covered from the rest of the estate. If the deceased has enough money in their bank account to cover these costs then it may be possible to pay the funeral bill before the Grant of Representation has been received. You will need to speak to the bank in question to establish whether they will release funds to settle the funeral bill without seeing a Grant of Representation.
Next, the Estate administration expenses will need to be paid. These are the expenses which are incurred as part of the Probate process. These might include the Inheritance Tax liability, any professional valuation or estate agent fees and the fee for obtaining the Grant of Representation.
The next category of debt that will need to be covered is what's called "preferred debts." These debts are less common, but might include things such as wages due to employees if the deceased owned a business.
After the above have all been settled, any unsecured debts can then be paid off. This might include credit card bills or outstanding bank loans. Then any interest on these unsecured loans must also be paid.
Finally, debts known as "deferred debts" will need be settled. This could refer to informal loans, such as those between family members, for example.
What If There's Not Enough Money to Settle Debts?
If there's not enough money to cover all of the Estate's debts, then it is what's called an Insolvent Estate. In these circumstances, the debts will need to be settled in line with the order of priority set out above. When the money runs out, the remaining debts will usually be written off.
For this reason, it's important that no debts at all are paid until the total value of the Estate and the total value of the debts have been calculated. If a debt to a family member is paid, for example, and this then means that there is insufficient money left in the Estate to pay off the deceased's credit card bill, then the Executor could be held personally liable for this.
Co-op Legal Services is the largest provider of Probate and Estate Administration services in England and Wales, trusted to deal with over £1.3 billion in Estates annually.