What happens to debt when you die?

No, your debts don’t automatically die with you. 

When you pass away, any outstanding debts you have become part of what’s called your estate. Your estate includes everything you owned at the time of your death, such as your property, money, and possessions. 

This means that your possessions and financial assets, such as savings, a death in service benefit, pension etc, may be used to settle your debts if you pass away. However, if there’s not enough money in your estate to cover all the debts, things can get a bit more complicated.

If your estate doesn’t have enough money to cover all your debts, they will still be paid in a specific order, as set by law. Usually, secured debts (any debts which use an asset as collateral) and funeral expenses are paid first, followed by any other priority debts, like tax arrears.

Unsecured debts, such as credit cards, are usually paid last and may only receive a partial payment or nothing at all. This means that if there's no money left after clearing all secured and priority debts, unsecured creditors may not get paid.

The responsibility for paying off your debt usually falls to the executor of your estate. If you've written a will, this would be the person you've chosen to manage your affairs after your death. They will use the money from your estate to pay off any outstanding debts. If there’s no will, an administrator may take on this role. They need to apply for permission to do this.

In most cases, your family members won’t inherit your debts directly. However, the amount they stand to inherit from your estate could be significantly reduced if a large portion is used to settle your debts.

There are exceptions, though. For example, if a family member co-signed a loan or acted as a guarantor, they could be responsible for paying it off. Similarly, if a debt is secured against an asset, such as a mortgage on a house, the family might need to deal with this debt if they want to keep the asset. 

Debts come in many forms, and understanding the different types of debt can help you to appreciate what might happen after you pass away.

Here are some common types of debts:

• Secured debts. These are tied to an asset, like a mortgage or a car loan. If these aren’t paid, the creditor can take back the asset.
• Unsecured debts. This includes things like credit card debt, personal loans, and utility bills. There’s no specific asset tied to these, so creditors may take a claim against your estate.
• Joint debts. These are debts taken out with another person, like a joint mortgage. The surviving person usually becomes fully responsible for the debt.
• Tax debts. If you owe any unpaid taxes, these will need to be settled by your estate.

Information on taxation is based on our understanding of current UK legislation and practice. However, tax rules may change in the future.

Yes, life insurance can be used to pay off debts when you die, but it depends on the type of policy.

If your life insurance policy is written in trust, the payout goes to the trustees to distribute, and doesn’t form part of your estate, meaning it cannot be mandated to help pay off your debts. However, you could still take out life insurance to help protect a mortgage and have that written under trust.

However, if the policy isn’t in trust, the payout becomes part of your estate and may be used to settle any outstanding debts before being distributed to your beneficiaries. Some people choose to use life insurance specifically to cover debts, such as a mortgage, ensuring that their loved ones won’t have to worry about these financial burdens after they’re gone.