Does debt die with you?

How an individual’s debts are handled when they die depends on their assets, the types of debt left behind and whether anyone else shares in them.

Debt is usually a sum of money one person owes to another (or to a bank, finance company, retailer etc). It can be a one-off loan, hire purchase, mortgage, or overdraft, amongst a range of available financial products. It is sometimes to help the borrower do something or enjoy some aspect of life better before they have time to save up and pay for it outright. 

What happens to debt when someone dies?

When a person dies, their debts will be paid from their estate. Typically, an estate consists of a variety of items, including funds in bank and building society accounts, money from insurance claims, property, investments and possessions. However, if the debts were taken out in joint names, the other person takes on liability for the full amount outstanding. When borrowing is in a sole name, liability is not passed to a partner or family member unless they were guarantors. 

In the case of a mortgage, there should be a life insurance policy to cover the outstanding amount on death. Should the deceased have no estate, however, their debts will be automatically written off, as there is no money with which to repay them, and their family is not liable.

Who is liable for debts after death?

It is a common misconception that family members may be liable for their spouse’s, parent’s or child’s debts after death. This is generally not the case, unless the debt is a joint account; in that instance, everyone who has signed up is liable. Similarly, if a loan has been guaranteed by a family member, such as a parent signing alongside an adult child for money which they otherwise wouldn’t get, then they would also be liable.

Who deals with the estate?

The person responsible for dealing with an individual’s estate after death is known as the executor. There are two types of executor of estate in Scotland: an ‘Executor Nominate’ and the ‘Executor Dative’. The first is the appointed by an individual to wind up their estate in their will, whereas an Executor Dative is appointed by the Court to wind up an estate if no will is left or an executor has not been nominated.

If executors fail to wind up an estate properly, it can lead to serious consequences. For instance, any debts must be settled before an executor can distribute any of the estate to beneficiaries. Otherwise, they can be held personally responsible for the debts up to the value of all the funds given away. This is one instance in Scottish law when liability for any unpaid debts can be transferred from one person to another.

It is also the executor’s responsibility to check gas, electricity and telephone accounts, as well as any firm where the deceased had an account or a credit, hire purchase or rental agreement. This is usually when creditors are invited to make claims.

What if there is a large amount of debt?

Should the debts be greater than the assets of an estate, then the executor has legal duties to perform. Complicated rules come into play, as the executor is unable to pay out anything else and instead work out how the creditors are to be paid. If this cannot be done in full, look to establish whether anyone (such as the taxman or any mortgage lenders who hold security over the house) has priority. Clarification is also required as to whether the debts need to be apportioned so that, as with bankruptcy, lenders get a percentage of their full sums.

If in winding up the estate of the deceased, the executor realises that the estate is insolvent (so there is not enough money to pay off any debts), they are legally obliged to sequestrate the estate - which means making it bankrupt. If this is not done and the executor gives away the funds of the estate, they can then be held personally liable to the creditors. 

However, executors are only liable for paying the deceased debts up to the extent the funds in the estate allow them to. So, if the debts are £15,000 and, after funeral and deathbed expenses, only £5,000 remains in the estate, then they are only responsible for paying the £5,000. However, should such a scenario occur, the estate should be made bankrupt. (There could be alternative options available, such as making offers of composition, but all creditors would need to agree and legal advice should be sought.)

As the role of executor can involve additional costs and responsibilities, it is worth taking advice before agreeing to become one. However, even if you are appointed as an executor in a will, you do not need to accept the role.

Scottish law has a careful and well-established set of rules for debt and death. As with most legal issues, best practice is to understand these before incurring a financial obligation. So, if you have any concerns about debts after death, wills or becoming an executor, seek legal advice.

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