What Happens to Debts When You Die? Impact on Your Estate and Beneficiaries
Many wrongly believe that debt simply disappears when you die, but in reality, a deceased person’s debts form a legal obligation. Executors or administrators (your personal representative) must settle these from the deceased person’s estate before any inheritance is handed over.
So, what exactly happens to debt when you die? Let’s break it down.
This information is provided for general discussion and does not constitute legal advice – with any specific queries please contact our office.
Who Handles the Debts & Estate Taxes?
The executor named in the will – or, for a person who dies intestate, an administrator appointed via letters of administration – is responsible for paying debts, Inheritance Tax, capital gains tax, and income tax using the deceased person’s assets.
This role doesn’t make them personally liable for debts, except in cases of negligence or where they take money before debts are known.
The deceased’s assets might include bank accounts, property, pensions, life insurance policies, or even personal possessions like cars or jewellery.
Before any inheritance can be passed on to beneficiaries, the estate must cover all funeral expenses, administrative costs, and pay outstanding debts in a legally defined order. To do this, the executor will usually need to apply for probate or letters of administration.
Applying for Probate or Letters of Administration
To access bank accounts, sell property, or oversee insurance policies, you’ll need a Grant of Probate (if there's a will) or letters of administration (if not).
Probate incurs a probate fee for estates over £5,000 - £300 plus £1.50 per extra copy, unless you qualify for a reduced or no fee.
This legal process proves their authority to act on behalf of the person’s estate and gives them the power to collect money, settle debts, and distribute what’s left to beneficiaries. Without this formal step, most institutions including banks, mortgage lenders, and insurance providers won’t release funds or information.
The document you apply for depends on the situation:
If the person who died left a valid will, the executor applies for a Grant of Probate.
If there’s no will, or no executor is named or available, a close relative or surviving spouse can apply for letters of administration.
Applying for probate involves:
Submitting the death certificate
Completing inheritance and income tax forms
Paying any applicable probate fees
Providing a full valuation of the deceased person's assets and debts
Once granted, probate or administration allows the personal representative to begin settling the estate. This includes paying funeral expenses, handling legal obligations, and working through all the outstanding debts.
Valuing the Estate & Settling Taxes
Before debts are addressed, you must value the estate. This includes property, personal possessions, bank accounts, life insurance policies, and rental property. Once this is done, the value will need to be reported to HMRC.
Inheritance Tax is due if the estate exceeds the nil-rate band (currently £325,000 plus main residence allowance), it’s payable within six months of death.
The estate must also pay income tax on earnings (e.g, rent, interest) and capital gains tax on assets sold above their probate value.
Paying Debts: Secured, Preferential & Unsecured
Once probate or letters of administration have been granted, the personal representative can begin to settle the deceased person's debts.
There’s a strict legal order for who gets paid first. Understanding the difference between secured debts, preferential debts, and unsecured debts helps ensure everything is handled properly and in line with the law.
Secured debts (e.g, mortgage, joint mortgage, car loans). A life insurance or insurance policy tied to a secured debt may cover the amount.
Funeral expenses, legal costs, and probate fees. Funeral costs must remain reasonable relative to estate size.
Preferential debts, like employee wages (this is rare in personal estates).
Unsecured debts, including credit card debt, unsecured loans, personal loans, council tax, utilities, and outstanding debts from credit agreements.
5. Deferred debts, such as loans between family members.
Paying debts in the correct order is essential to avoid mistakes that could leave the estate – or in some cases the personal representative – open to legal issues. If there’s not enough money in the estate to cover all the debts, you may be dealing with an insolvent estate, which requires extra care.
What About Joint Debts & Guarantees?
If a joint tenant, joint loan, or joint debts exist (e.g, joint mortgage, council tax), the co-holder remains responsible for the deceased person’s share .
Similarly, any loan guarantee or if someone acted as guarantor, liability shifts to that person.
Insolvent Estates: When Debts Exceed Assets
An insolvent estate is when the deceased person’s debts exceed their assets.
In some cases, it may be necessary to sell off assets, like a home, car, or rental property, to raise funds. If assets still fall short, creditors may receive only a portion of what they’re owed, and some debts may go unpaid altogether.
Importantly, neither the executor nor the family members are required to use their own money to cover these debts, unless they acted as a guarantor, held joint debts, or were liable for a loan guarantee. The key is to manage the process transparently, carefully, and within the law.
If you're dealing with an insolvent estate, it’s best to avoid making any payments without first consulting a probate solicitor or specialist debt advisor. Mishandling the process could leave the personal representative personally liable, even if they were acting in good faith.
Effect on Beneficiaries & Inheritance
Only once all debts and tax obligations – including paying debts, funeral costs, and fees – are settled may beneficiaries receive any inheritance.
Beneficiaries inherit what’s left after the estate’s legal obligations are met. If the estate is well-managed and the deceased planned ahead, perhaps with life insurance policies to cover debts or taxes, beneficiaries are more likely to receive their full inheritance.
However, if the estate doesn't have enough money to meet all its obligations, then even gifts specified in the will (such as legacies or a specific lump sum) can be reduced. This process, known as abatement, ensures that creditors and tax authorities are paid first, and that any remaining funds are divided fairly according to legal priority.
Conclusion
Debt when you die becomes the responsibility of the estate, not your loved ones (unless they share joint liabilities). Your personal representatives must use all estate proceeds – bank accounts, property, insurance, and income – to pay debts, taxes, and funeral expenses. Beneficiaries will only receive their inheritance once all obligations are fulfilled.
If you're an executor navigating complex debts, insolvency concerns, or substantial inheritance tax exposure, it's wise to talk to a probate practitioner. They can ensure the estate is handled correctly, protected from personal risk, and distributed fairly to family members in line with legal obligations.
Contact Hillman Legal today – we’re here to make a difficult process as smooth and straightforward as possible. Our expert team handles the legal complexities with care, so you and your family have the time and space to focus on what truly matters.
Related articles you may find helpful:
How Much Does Probate Cost? — Understand the typical fees involved, including application costs, legal fees, and potential extra charges.
How Long Does Probate Take? — Learn what factors affect the timeline of the probate process and how caveats can cause delays.
What Is a Grant of Probate? — A clear explanation of what a grant of probate is, when it’s needed, and how it differs from letters of administration.
What Is a Probate Caveat? — Learn how entering a caveat can temporarily pause probate to resolve disputes or concerns about a will or executor.