There are two common misconceptions about what happens to your debts when you die.
The first of these are your debts die with you; the second is your relatives must pay your debts.
Neither of these are strictly true, but neither are strictly wrong either. Both outcomes are possible and depend on a number of factors.
Do your debts die with you?
When you die, your debts don’t die with you, instead they continue to be due for payment and should be paid off by the Executor of your estate, using the money and other property you leave behind when you die.
Who is the Executor of your Estate?
The person responsible for paying your debts once you die is your Executor. This is the person who has the right to wind up your estate and deal with your assets on your death.
There are two types of Executors in Scotland: the first is an Executor Nominate, and the second, the Executor Dative. An Executor Nominate is the Executor you appoint to wind up your estate if you leave a will; whilst an Executor Dative is an Executor who is appointed by the Court to wind up your estate, because you did not leave a will or nominate an Executor in your will.
Executors must wind up an estate properly and if they don’t it can have serious consequences for them.
So, for example, if an Executor is winding up your estate and gives away all your money before paying your debts, they can be personally held responsible for your debts up the value of the money they gave away. This is one instance in Scots Law, when liability for a debt can transfer from one person to another person.
Equally, if an Executor is winding up the estate of a deceased person and realises that the Estate is insolvent, that is there is not enough money to pay off the debts of the deceased, then they are under a legal obligation to sequestrate the estate, which means making it bankrupt. If they don’t and give away the funds of the estate, then they can be held personally liable to the creditors, that is the people who are owed money by the estate.
For this reason, it is always worthwhile taking advice before you agree to take on the role of Executor, as it may involve additional costs and responsibilities that you may want to avoid. Even if you are appointed as an Executor in a will, you do not need to accept the role.
Executors are only liable for paying the deceased’s debts up to the extent the funds in the estate allow him to. This means if the debts are £13,000, and after funeral and deathbed expenses there is only £4,000 in the estate, then they are only responsible for paying over the £4,000, although in such a situation the estate should be made bankrupt (there may be alternative solutions such as making offers of composition, but all creditor need to agree and legal advice should be sought).
If you need advice on acting as an Executor, or whether you should act as an Executor, you can contact the Sheriff Clerk in your local Sheriff Court who can advise you on how to wind up an estate, or whether you need to appoint a solicitor.
You can find the contact details of your local sheriff court on the Scot Courts Website. You can also get more information on how to wind up an estate from their webpage Dealing with a Deceased’s Estate in Scotland.
Paying debts from an Estate
There are rules that govern how money in an estate is distributed.
The rules are it should first be used to pay off the expenses of your funeral and any costs that are incurred when you were dying, known as your death bed expenses.
It then should be used to pay off your debts.
Even then there is an order as to how your estate is used to pay off your debts. So, for example, if you own your home that should be used to pay off any debts secured over your home first, such as your mortgage.
If there is any equity left over once that is done, it should then be used to pay off your ordinary unsecured debts, like credit cards and loans.
However, if you have no money left when you die, or what you have is only enough to pay off your funeral and death bed expenses; or if there is money left, but not enough to pay your debts in full, then your estate is effectively insolvent, which means there is not enough money to pay your debts.
In such a situation money should not be given to any of the people that are named as beneficiaries in your will until all your debts are paid.
If there is no money left to pay your debts, your lenders will normally write them off if they are notified of your death, otherwise they are usually written off by law because they become statute barred.
Is anyone else responsible for paying my debts when I die?
The general rule in Scotland is no-one else can be held responsible for paying your debts. However, this is subject to several caveats.
The first of these, as covered above, is the Executor of your estate can be held responsible to the extent the estate allows him to pay off your debts.
The second is where a debt is a debt that is joint and several, that means owed by both you and another person, the other person can still be pursued for the full amount owing. An example of this may be council tax debt if you lived in your home with someone else. It could also mean a joint personal loan that you took out with someone else. Or it could mean a loan where someone else acted as the guarantor for the loan.
Liability for utility bills like gas and electricity arrears can also transfer to someone else if they lived in the home with you prior to you dying. This because they will be considered beneficial users, even if their name was not on the account.
That is they got the benefit of the services so they can be held liable for the bill.
Another situation is where there is a Survivorship Clause or what is also known as Special Destination Clause in the title deeds to your homes.
Survivorship Clauses (Special Destinations)
A Survivorship or Special Destination Clause in the title deeds to a home will normally state the property is owned by “Owner A and Owner B and the Survivor”.
What this means is the property is owned jointly by both and on the death of one of them, the other, “the Survivor” becomes the sole owner.
When a property has such a clause in the title deeds, the property on the death of one of the owners, automatically becomes the outright property of the other owner. No conveyancing is required, and the property never is dealt with by the Executor of the estate.
However, Scotland’s Supreme Court, the Court of Session, has held in such cases (Fleming’s Trustee v Fleming) the surviving owner, when they take the other owners share of the property also take their liability for their debts up to the value of the property that was transferred to them by the Survivorship Clause.
What happens if you are in a Bankruptcy or a Protected Trust Deed when you die?
If you are in a Bankruptcy or a Protected Trust Deed when you die or were in a Bankruptcy or Protected Trust Deed and received a discharge, but your Trustee has not been discharged, the Trustee will continue to wind up your estate.
The Trustee can cash in any life policies you have and can also use them to pay your debts and the costs of winding up your estate, unless your life insurance policies had been put into trust for beneficiaries that you named, in which case the money goes straight to them.
When a life insurance policy names someone as a beneficiary, that person is not liable to pay your debts and can take the money free from such obligations.
Where you were in a Bankruptcy or a Protected Trust Deed, and were discharged, but your Trustee was not at the date of your death, your Executor should take legal advice on any life insurance policies as there is a strong legal argument, supported by case law, that the Trustee may not be allowed to cash in your life insurance policies (see here), if your death occurred 4 years after the date of your insolvency (this is a complex area of law and legal advice should be taken).
If you are in a Bankruptcy or a Protected Trust Deed when you die, you Trustee will have no legal responsibility to pay your funeral costs or deathbed expenses, so these can fall upon your family.
However, where there was a life insurance policy, many private sector Trustees will seek the permission of the creditors to pay the funeral expenses and deathbed costs. Unfortunately, the Accountant in Bankruptcy, the Scottish Government agency that deals with bankruptcy, never does this.
If an Executor is appointed to wind up your estate, and the Trustee for your Bankruptcy or Protected Trust Deed is still in office, they can only deal with assets that do not form part of your estate being dealt with by the Trustee.
Death and the Debt Arrangement Scheme
Unfortunately, under the Debt Arrangement Scheme, the rules state your Debt Payment Programme (DPP) must be revoked on your death.
This means all the interest, penalties, charges and fees you would have been paying had you not been in the Debt Arrangement Scheme can be reapplied and will need to be dealt with by your Executor.
If you are in a joint DPP with someone and it is revoked because they have passed away, the revocation has no effect for 14 days, meaning you are still protected from your creditors. However, you will need to reapply for a new Debt Payment Programme and the interest, charges, fees, and penalties from your previous joint DPP can be reapplied.
Seeking Specialist Advice
If you are worried about what will happen to your debts on your death, you should seek specialist advice from a money adviser, or where you believe your affairs will be complex, or involve your home and other assets of value, you should seek the advice of a solicitor who has expertise in this field.
If you have been left with the responsibility of winding up the estate of someone who has debts, contact your local sheriff court (see Scot Courts Website.) You can also get more information on how to wind up an estate from the Scottish Courts webpage Dealing with a Deceased’s Estate in Scotland.