Do personal debts die with you?

When you die, your debts will be paid from your estate unless they were taken out in joint names, in which case the other person takes on liability for the full amount outstanding. If borrowing is in your sole name, liability does not pass to your partner or family unless they were guarantors.

In the case of a mortgage, there should be a life insurance policy to cover the outstanding amount on death. Should you have no estate, however, your debts will be automatically written off as there is no money with which to repay them, and your family are not liable.

What might your estate comprise?

• Cash in bank and building society accounts
• Money from insurance claims
• Property
• Investments
• Possessions

It is the responsibility of your executor or administrator to make sure that all debts are cleared before any other claims are made on the estate. Executors are generally family members and/or solicitors, but if relatives are the only executors it is vital that they seek legal guidance if the estate is insolvent.

Responsibility for liaising with financial institutions and arranging repayments lies with the executors. When debts are present, they form a ‘hierarchy’ and have to be repaid in a specific order.

What is an insolvent estate?

Your estate will be deemed insolvent if there are insufficient assets to pay your funeral expenses and debts. Outstanding liabilities within insolvent estates in Scotland should be repaid in the following order:

• Expenses of the Trustee
• Funeral and testamentary expenses associated with administering the estate
• Preferred debts,
• ‘Ordinary’ debts, including unsecured debtors such as credit card and store card providers

There may be enough assets within an estate to pay some, but not all, of these expenses. In these cases, any remaining unpaid debts will be written off. Provisions made for beneficiaries within a will no longer apply if the estate is insolvent, which should be administered in accordance with legislation laid down in the Bankruptcy (Scotland) Acts.

A closer look at debts to be repaid

• Mortgage
  As a secured creditor, the mortgage lender will take as much of the value of the property as possible to repay what is owed, but any remaining balance will be treated as unsecured debt.
• Funeral costs
  Funeral costs will need to be in proportion to the value of the estate, and if debts exist, should not be excessive. Headstones and other memorials are not generally considered to be part of the cost of a funeral.
• Testamentary expenses
  Records should be kept for all relevant expenses incurred in administering the estate. These might include travel, petrol or postage costs.
• Unsecured debt
  This includes tax and National Insurance liabilities, utility bills, credit card and store card debt, plus personal loans. In the case of credit card and other unsecured debt, any linked Payment Protection Insurance policy may include life cover, so it is worth checking whether this exists.

Each category of debt within this hierarchy has to be cleared in total before moving on to the next one.

In general, when you die your debts will either be repaid from your estate or are written off. Your family do not become liable at any stage unless they are party to a loan or have provided a personal guarantee, in which case they will become liable for the whole outstanding amount.

Scotland Debt Solutions provides professional debt advice to anyone living in Scotland. We have five offices around the country, and offer same day meetings free of charge.