British people owe around £1.8 trillion in debt, which is around £64,581 per household (including mortgages), according to the latest stats from The Money Charity. Debt is, unfortunately, more common than you might think and, despite the popular belief that “your debts die with you”, debt can actually outlive us and fall onto our loved ones when our time is up. So what happens to your debts after you’re gone?

In general, all debts in your sole name are paid from your estate. Your estate is all the money, property and other assets that you own (or are entitled to) at the time of your death. The people dealing with your estate have to identify all your assets and debts, then use the assets to pay off all the debts before giving anything to your beneficiaries. As long as this happens and all the proper procedures are followed, your loved ones are unlikely to become liable to pay off your debts.

An exception to this is that anyone who acted as a personal guarantor for a loan in your sole name will become liable to pay off that loan if your estate doesn’t have sufficient assets to cover it.

The situation is different where you have debts in joint names with another person, for example, a loan taken out in the joint names of yourself and your partner. Depending on the terms of the original loan agreement, this kind of debt is likely to automatically transfer to the survivor of you on your death, rather than being paid from your estate, and the survivor then becomes responsible for paying off the debt themselves, usually by maintaining the regular monthly payments. The most obvious example of this would be a mortgage taken out in joint names. Fortunately, most people take out some form of life insurance to pay off the outstanding mortgage rather than leaving the survivor with a huge debt to pay on their own.

In an ideal world, we would all leave behind sufficient assets to pay off our debts. But what happens when we don’t?

If your assets aren’t enough to pay off your debts, your estate is said to be “insolvent”, but your loved ones should still be in the clear as long as they receive nothing from the estate and they follow all the rules. The rules in this regard are complex and classify debts into different levels of priority – for example, funeral costs are high priority, whereas utility bills and credit cards are lower priority. Debts have to be cleared according to where they rank in priority, with higher-priority categories being paid off first. Paying a lower priority debt can lead to trouble for loved ones if the estate runs out of assets before the higher ranking debts are settled – in these circumstances, they can become personally liable for all the unpaid higher ranking debts, and even some of the lower priority ones.

Clearly, it’s of utmost importance that all the assets and debts are identified. This can be a difficult and time-consuming process, especially given the move away from receiving paper statements for accounts and bills – gone are the days when everything was clearly set out on paper in a biscuit tin under the bed!  With so much information now available online only, it’s much easier to miss important details when trying to piece together the full picture of a lost loved one’s financial position.

Some assets may be easy to identify, for example your car, your home, or bank accounts where monthly paper statements continue to be issued and sent to your house after you’re gone. However, other accounts and investments might only generate a paper statement once a year (if ever), by which time your house might have been sold and the statement “returned to sender” by the new occupier.

Similarly, debts also range from the relatively obvious, such as mortgages, credit cards, or household utility bills, to the less obvious, such as sums owed to the taxman for underpaid tax, the Department for Work & Pensions (DWP) for overpaid benefits, or the local authority for deferred care fees. Again, it can be a long time before any paper demand for payment arrives through the letter box of your former home.

By making a Will, you get to choose your own executors; these are the people who will deal with your assets and debts – your estate – after you’re gone. This is the best way to ensure that things are handled by a capable person who you trust to do everything properly, including protecting your loved ones from inheriting your debts. You can choose up to four executors, perhaps with a range of different skills.

If you die without leaving a Will, the rules of intestacy will apply – this is a rigid set of rules governing who can deal with your estate and taking no account of individual circumstances. This can result in an unsuitable relative being appointed to handle your estate, who might unwittingly put the estate, themselves and your loved ones at risk.

Our Private Client team can help with identifying unknown assets and debts, protecting your executors against unidentified debts, searching for missing/unknown Wills, and all aspects of estate administration.

Do you need help with your Will and estate planning? Or perhaps you’re an executor or relative dealing with an estate and need legal guidance? Get in touch with our Private Client team today.