What happens to my debt when I die?

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Our debts do not die with us, they are carried over into our estate. It is reported that Michael Jackson died with approximately £500 million worth of total debt; so what happens to these debts after we die?

Who is responsible for my outstanding debt when I die?

When a person dies, the Executor of the Estate is required to ensure that all debts are paid in full.

Before the Executor can report to the Beneficiaries on how much they are going to inherit, the Executor must first establish the net value of the Estate. This is the value of the Estate after taking into consideration any debts.

If the Estate is solvent, meaning that the Estate is in sufficient funds, the assets within the Estate must first be used to pay these debts, which may mean certain beneficiaries could receive less than they were expecting. It is even possible that the Estate may be insolvent, and the debts outweigh the assets, therefore resulting in the beneficiaries receiving nothing at all from the Estate.

How does the Executor of a Will go about ensuring all debts are paid?

It is important that the Executor deals with debts efficiently and contacts all creditors as soon as possible to avoid any additional interest that the Estate may need to pay. As an Executor you are required to account to the Beneficiaries and therefore, it is your duty to show that you have attempted to mitigate any additional cost to the Estate.

Depending on the value of assets and debts in the Estate, you will need to consider a complex legal procedure called abatement. This applies when liabilities have been paid from assets in the Estate and therefore, insufficient funds are available to pay all of the legacies in full.

As mentioned above, how debts are treated against the value of gifts to beneficiaries within a Will depends on how the Will has been drafted. If the Will specifies the order in which legacies should be paid, this will need to be followed. Alternatively, if the Will has been drafted so that liabilities are to be paid firstly from the residue, then from pecuniary legacies and finally from specific legacies, again, depending on how the Will has been drafted, it is possible that the residuary beneficiaries could end up receiving a much lower sum than expected or even nothing at all. In these circumstances, it may be that the beneficiaries will wish to vary the terms of the Will which is a possibility, subject to the circumstances. A specialist solicitor can help executors with this document.

What if the estate is insolvent and the debts are not paid in full?

If the Executor finds themselves in a situation where the assets are insufficient to pay all of the debts, the Estate is Insolvent. The Executor must still account to the beneficiaries and creditors in this respect and it may be that negotiations have to take place between creditors and debt collection agencies to negotiate any terms of repayment.

Should I seek advice from a solicitor to help pay off debt in an estate?

When dealing with an insolvent estate, the order for paying debts is set out in law. It is important as an executor that you seek advice about the different types of debt as well as the order of priority as, if money is paid to a creditor with lower priority regardless of whether this was an accident, you will be personally liable. Seeking advice from a solicitor to help with this process will ensure that you are protected.

It is beneficial to an executor when dealing with an estate with a large number of debts, to instruct a legal professional to ensure that all debts and gifts within a Will are dealt with correctly. A solicitor will also look into whether or not there are any suspicious debts and any cause for concern with regard to fraud or abuse. Instructing a solicitor to deal with the Estate and debts on your behalf will ensure the matter is dealt with correctly and in accordance with the law, therefore offering reassurance that you will not be held personally liable should any mistakes be made.

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