In this economy, the accumulation of debt is seemingly unavoidable. In fact, the sum of consumer debt in the UK has exceeded £1 trillion. It is a common misconception that, when a person dies, their debts are written off. This is false; any outstanding debts of the deceased must still be paid, and are usually deducted from the estate.
An estate is defined as the sum of an individual’s assets, including cash (including from insurance), investments, property and possessions. Probate is the process through which the terms of the will are carried out. This process has several steps. First, at the time of death, the will is reviewed in order to determine the person chosen to handle the estate. This person is usually a relative or close friend of the deceased and is known as the “administrator” or “executor”. However, in the event that there is no will in place, an executor will be appointed. The executor needs special proof of permission, known as “letters of administration” to handle the estate if its worth exceeds a certain amount. Next, creditors are notified of the death of the individual and informed that they have a specific time frame in which they must present their accounting of all outstanding debts to the estate (known as the ‘term of probate’). In order to receive any portion of unpaid charges, creditors must bill the estate, not the beneficiaries. After the estate is appraised and valued, the initial responsibility of the executor is to pay off any outstanding debts in the appropriate order. For example:
• Mortgages and other housing debts must be paid off first. If life insurance was required by the mortgage lender, this may pay off the full amount of the loan. If no insurance is available—or there is a second mortgage in place—the property may have to be sold. Any rental arrears or leases must also be taken care of. If housing is a shared property, a portion of the value of the property will go to the surviving tenant, and the share belonging to the deceased becomes part of their estate. Any outstanding debts against the property must be paid from the estate. Unfortunately, this often results in the sale of a home in order to pay the debt(s). However, it may be avoided by negotiating with creditors and having a payment plan put in place. If those residing at the home were “joint tenants”—meaning the property was owned together– the deceased person’s share passes automatically to the surviving tenant. If there was a “joint tenancy” of the rented property, the surviving tenant is responsible for the debt. However, there is no liability for previous rent for the individual who takes over the vacant tenancy. As in the case of a “shared property” any unpaid debts must be cleared as soon as possible. It is in the best interest of those overseeing the housing estate to come to a payment agreement with creditors in charge of the property. Creditors can now file an “Insolvency Administration Order” within five years of a tenant’s death, which divides the property into two portions in order to force a sale. Information on property ownership can be found in the lease or deed, or in the Will. Locating this information is vital, as it provides proof of tenancy and can determine the legal course of action available to those handling the estate.
• Concerning water rates, anyone still residing on the property is responsible for remaining and ongoing charges. This applies even if their name isn’t on the bill.
• Council Tax ceases when there is no longer anyone living in the house. If residents are still present, they are held liable for any outstanding or current balance. Any unpaid takes or overpaid benefits or pension are also paid out of the estate.
• Fuel bills become the surviving tenant’s responsibility only if the living arrangement was a “joint tenancy”.
•If the deceased was in the process of purchasing any type of goods, they do not become part of the estate until/unless the last payment has been made. However, if over one third of the agreed upon purchase price has been paid, the seller needs a court order to get the goods back. Executors of an estate are advised to determine whether or not the deceased arranged a payment protection plan—before returning any goods.
• Repayment of personal loans, credit cards and credit debt must wait until others have been settled. If cards are held jointly, any debts will be the joint holder’s burden. However, if the credit card was in the deceased’s name only, the creditor must contact the executor of the estate to negotiate repayment. It is not uncommon that a credit card company is unable to produce their accounting information within the term of probate. In cases such as these, some effort may be made to force repayment by the beneficiaries of the estate. These attempts are illegal and should be handled by an attorney as soon as possible.
It is a common assumption that the surviving spouse inherently becomes responsible for the debts of the deceased, but this is not always the case. In fact, there are only specific circumstances in which this is so. For example, if a joint loan were taken out in both spouses’ names or if one spouse signed as a guarantor for a loan taken out in the deceased spouse’s name, the debt will then be passed to the surviving partner. New laws have granted members of a civil partnership the same rights as those who are married; for example, one partner can pass on their estate upon death to the other, without having to pay the 40% Inheritance Tax. On the other hand, couples whose relationship is not recognized by law are, unfortunately, not entitled to the Inheritance Tax exemption. Many in this situation are advised to apply at the registry office in order to forego the tax burden. Another viable option is a discretionary will. These arrangements involve the transfer of the deceased partner’s estate to a trust, the contents of which can be loaned to the remaining partner when necessary. This can avoid the Inheritance Tax altogether and can dramatically reduce it for estates worth more than £285,000.
Beneficiaries of the estate cannot be paid until all outstanding debts are satisfied. If a bank account is in the name of the deceased only, no one will be permitted to use the money until all debts pertaining to the estate are cleared. If there is a joint bank account, the remaining account holder will usually still have access to the available funds.