What happens to my debt when I'm gone?

What happens to my debt when I'm gone?

One of the most difficult periods we go through in life is that following the loss of a loved one. Not only does this impact us emotionally, physically and mentally, it can also have a detrimental effect on our financial health and plans for the future.

According to our recent Protecting Our Families1 report, more than one in five (21%) people say they worry about losing the main breadwinner’s income every week. Although many families worry about this on a regular basis, more than two thirds (68%) said they have no plan in place if the worst were to happen to the main earner.

With all of the worries and concerns associated with losing a loved one, we understand the last thing families want to be thinking about is debts. We’ve gone through some of the essentials, to help families understand the procedure of this process through this difficult time.

What types of debt could be left behind?

Aviva’s latest Family Finance Report2revealed that average household debt – excluding mortgages and student loans – has risen to £17,630 over the last year. Debts can be broken up into two key types:

Secured debts

Having a secured debt means that money borrowed from the lender is guaranteed by collateral from the borrower – such as property3- can be offered at better rates than an unsecured debt. Also secured loans provide less risk to the lender, the borrower then has the risk of losing the collateral. Types of secured debts include:

  • Mortgages
  • Car loans
  • Selected credit cards

Unsecured debts

An unsecured debt means that the money borrowed from the lender isn’t backed by collateral or an underlying asset. However, failure of payment could mean the lender can sue the borrower and get a court judgement – potentially leading to the borrower’s property being used as payment. Types of unsecured debts include:

  • Credit cards, loans and overdrafts
  • Unpaid household bills and other services or utilities
  • Gambling debts

Who is responsible for my debts?

Debts can only be inherited if they are joint debts, or debts that two or more people are responsible for. If someone else is named on a credit agreement, then they will become responsible for paying the outstanding balance.

On the other hand, if a debt is only in your name, it will be repaid using your estate, or written off if no estate is left behind. If a will was left behind, then the beneficiaries will not inherit the debt, although they will only receive the inheritance once funeral costs and debts have been covered.

If debts were shared in a marriage or cohabitation, it’s important to notify creditors of the situation. Although this is the last thing people will be thinking about, creditors will be sympathetic as long as they’re kept updated.

Keep any insurance documents somewhere safe for your partner to find, such as accidental death cover, or if you’re entitled to a ‘death in service’ payment from either a pension provider or employer – as this will help with paying off any unsecure debts.

How are debts paid off?

  • The value of the estate is calculated. Estate means how much money an individual has tied in savings, investments, property owned and possessions. The value of the estate will be used to cover funeral costs, as well as any administration fees for organising finances.
  • Any existing insurance policies are claimed against. Some people would have been paying into a policy – such as life insurance, whole life or life assurance – which will pay a lump sum should the worst happen. It’s worth making sure these documents are accessible for a family member.
  • Creditors should be informed of the situation by a family member, especially if debts are in joint names, otherwise creditors will demand payments and add stress to the already stressful situation. At this point, family members should ask creditors for a copy of your outstanding balance on the debt. More often than not, creditors will allow time for finances to be sorted.
  • Debts are paid off in order of importance. Secured debts, such as a mortgage will be paid off first. Next is funeral costs and admin fees. Lastly any unsecured debts that need to be covered. If there are more debts than estate, it’s best for the family to seek advice from either a solicitor or a probate specialist on the next steps they should take.

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Additional Sources

[1]The ‘Protecting Our Families’ study was designed by Aviva in collaboration with ICM Unlimited and Instinctif Partners. All findings quoted, unless otherwise referenced, are from research carried out independently by ICM among 1,593 parents with dependent children during Q4 2016
[2]The 2016/17 edition of the Family Finances Report interviewed 32,915 UK consumers between December 2010 and May 2016

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