How to Pay Debts Off After Death

If you are the executor of a loved one’s estate, you will need to settle their debts after they pass away. This can be daunting if you do not have experience with handling financial matters. We are here to help you, so this week, Prestige Tax and Trust Services explains how to pay off debts after death.

What happens?

Have you ever wondered, “what happens to debts when someone passes away?” A person’s debts are not automatically written off when they die – they are paid out of that person’s estate, which comprises everything that they once owned, from money to property. As an executor, you are the manager of the estate, so it will fall to you to contact creditors and pay off the relevant debts.

To do list

You will have a fairly long to do list as an executor, from applying for probate to gain the legal permission needed to manage the estate, to administering gifts and residue to beneficiaries. One of the earliest steps involved is valuing the estate for inheritance tax purposes. You will need value their assets, to determine the estate’s gross value, and then subtract any debts they owed from this total to figure out its net value. This is used to assess whether it owes inheritance tax to the government.

Assessing debts

This brings us to the question, “how do you identify the deceased’s debt.” Search through their financial documents, to determine how much they owed, and who their creditors are. You will also need to assess whether these debts are individual or joined (whether it is owed only in their name or with someone else) and are secured or unsecured, meaning whether the deceased used an asset as collateral. It is common, for example, for people to use their house as collateral for a mortgage, meaning that the creditor can take possession of the property if the person fails to meet repayments.

Contacting creditors

It is essential that you contact creditors, so they will give you the time required to handle the estate and settle debts. You should get in touch with creditors, inform them of the deceased’s passing and that you are dealing with their estate, before asking them for a statement displaying the outstanding balance of their debt. The creditor should agree to give you the time necessary and also halt the withdrawal of any regular payments from the deceased’s bank account while you apply for probate.

Check for insurance

We would also advise you to see whether the deceased took out any relevant insurance policies. For example, they may have insurance to pay off a mortgage in case of death. If they have insurance, you should check the conditions and then contact the provider, to make claim arrangements, so this money can be used to settle the relevant debt. If they do not have insurance, you will need to contact the creditor again to arrange re-payment, which you cannot do until probate has been granted.

Paying off debts

It is vital that you settle debts, before administering the estate to beneficiaries. You should pay the debts off in order of importance. Start with secured debts such as mortgages, as they carry the heaviest consequences when unpaid. After this, pay off the deceased’s funeral costs and finish with any unsecured debts they owed, such as outstanding credit card balances. If there is not enough money in the estate to pay off debts, you will need to sell off the deceased’s assets to raise capital.

Getting help

You may find that it’s impossible to pay off some outstanding debts at once, for example you might need time to sell off assets. In this case, settle the debts in priority order and negotiate with the creditors of less important debts, to pay them off in instalments. However, there may not be enough money, even when all assets have been sold off, to settle the estate’s debts. If this happens, contact an accredited debt advisor, who will help you figure out how to handle the situation.

Advertise debts

There is one final step that you should take, as the executor of someone’s estate, to ensure their debts are paid off. You might discover that the deceased owed debts that you were previously unaware of, and they will need settling before you distribute the estate. We would advise you to advertise in a local newspaper, giving any unidentified creditors time to come forward and claim against the estate.

Prestige Tax and Trust Services

The role of executor can be complex and time-consuming. If you have no experience with handling legal matters, you may struggle with these duties, so it is wise to enlist the help of someone who has the experience, such as Prestige Tax and Trust Services. Our talented team have the extensive legal knowledge you need to ensure your loved one’s wishes are carried out, when they are no longer here.

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