The only way someone else can be made responsible for your debts after your death is if they have actively agreed to do so. For example, if the debt was held jointly and severally, then the other party would become liable for it in the event of your death. Otherwise, your debt becomes the responsibility of your estate. Here is a quick guide to what you need to know.
Death and mortgages/IHT
When a property owner dies there are two main debts that need to be considered. The first is the mortgage and the second is the inheritance tax. If the mortgage is held in joint names then the surviving party automatically becomes responsible for paying it. If they cannot afford to do so, then the house will need to be sold to clear the outstanding debt.
If the mortgage is held in the deceased’s name only then their estate is responsible for paying it. How they go about doing this is at their discretion as long as they do. For example, if the deceased had sufficient other assets to pay off the mortgage, then their heirs may choose to keep the house. If, however, they don’t, then again, the house must be sold to clear the debt.
The situation with inheritance tax is more complicated. In basic terms, assets can be transferred between spouses and civil partners without any tax liability of any sort. A person’s main residence can qualify for an inheritance tax discount if it is bequeathed to a direct descendent such as a child or grandchild.
Neither of these allowances, however, is of any use to unmarried couples without children. They could find themselves facing a hefty IHT bill that could force them to sell their home. The obvious solution to both this and the issue of supporting the deceased’s share of the mortgage is to make sure that you have adequate life insurance.
Death and loans/credit cards
In broad terms, much the same comments apply to loans and credit cards. The key difference is that it’s much less likely that a debt will be held in joint names. Some personal loans may be in joint names but personal credit cards are usually in one name only. Student loans are cancelled upon death.
This means that typically, loans and credit cards will become the responsibility of a person’s estate rather than inherited by a cosigner (or guarantor). With that said, a person’s debts at death can still potentially impact the living. In particular, if the deceased has insufficient liquid assets/life insurance to pay off the debts then their house may need to be sold.
There are, however, several nuances here, two of which can be very important. Firstly, if a debt is in a sole name then only their assets can be sold to pay it. For example, if the deceased only owned 50% of a home, then their creditors can only recoup any money owed to them from that 50%, not the whole property. Secondly, loans and credit cards tend to be for much smaller amounts than mortgages.
It’s still advisable to have life insurance to cover them. Even if you do have liquid assets, life insurance can be a useful backup (just in case) and/or boost your heirs’ finances at a difficult time. Failing that, however, you may still have a bit more room to manoeuvre.
For example, you may be able to remortgage to cover the outstanding debt or have someone buy a share in the property to be redeemed when the surviving partner dies. Depending on the age of the survivor, equity release might also be a possibility. For completeness, none of these options should be used lightly but it may be useful to know that they’re available.