Owing Money to Someone Who Died: What Happens Next? | Howells Solicitors
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What Happens If You Owe Money to Someone Who Died?

Howells Solicitors

11 Dec, 2020

Lindsey Rawson Partner & Head of Wills, Trusts & Probate Lindsey.Rawson@Howellsllp.com 0114 249 6672

Losing a loved one is never easy, and it can be even more complicated if you owe them money. It’s common for people to accept loans from family members or friends. This can be to help pay for mortgage deposits, home repairs, to cover business investments or help pay for large purchases, to name a few.

As a debtor, you might wonder about your responsibilities and how a creditor’s death affects your obligations. As the loans are handled ‘informally’, they tend to lack any clarity of what will happen if the lender passes away. This, we know from experience, can lead to problems.

In this advice article, we will explore what happens if you owe money to someone who has passed away. We’ll explain the legalities of assets and debts, you’ll get to know if you still owe money after your creditor dies, when a loan becomes a gift and the steps you can take to resolve the situation without any legal complications. Read on for a comprehensive guide on this topic.

Understanding Assets and Debts

Assets and debts are crucial components of estate management. It is essential for the executor of the estate to have a comprehensive understanding of the deceased’s financial situation before they can make any decisions on any types of debt repayment.

This evaluation helps in determining if there are enough funds to cover the debts owed by the deceased, and in turn, if any debt owed to them needs to be repaid to the estate.

Various factors need to be considered when an executor makes a decision on debt owed to the estate, such as the type of debt, whether a written agreement was created, what is outlined in the deceased persons Will and the amount of money which is owed. There will likely be a consideration made to the relationship the debtor had with the deceased when they were alive.

Legal advice may be necessary to navigate complex situations involving assets, debts, and the rights of family members and creditors. By thoroughly understanding these aspects, the executor can make informed decisions and manage the deceased person’s estate effectively.

The Impact on the Debtor

If you find yourself in a situation where you owe money to someone who has passed away, it is important to understand the impact it has on you as the debtor (the person who owes the money).

One thing to keep in mind is that the debt does not simply vanish. The responsibility of settling outstanding debts lies with the deceased person’s estate, and therefore the executor of the estate.

The amount of money you owe will typically be deducted from the assets of the deceased person’s estate. It is crucial to communicate with the executor of the estate and follow the legal process for debt repayment.

Do You Still Owe Money If Your Creditor Dies?

When a creditor dies, the person who you owe the money to, your obligation to repay the debt does not automatically cease. The debt becomes part of the deceased person’s estate and must be repaid to the estate. Communication with the executor is crucial.

When Does a Loan Turn Into a Gift?

Sometimes a loan will be converted into a gift.

The main difference between a gift and a loan is that a loan can be legally repaid, whereas a gift is not repaid. 

When a person dies, all of their assets, possessions, property, and money will be included in their estate, whether the deceased was the creditor or the debtor (i.e. whether they loaned the money or borrowed it).

If a loan was provided by a relative or a friend, they might state in their Will that the debt doesn’t have to be repaid to their estate after they pass away. This will therefore convert the loan into a gift and does not have to be repaid.

However, if the loan is not addressed in the Will then it must be repaid along with any interest that has accrued.

Often, with informal loans, there is little or no paperwork to prove the terms of a loan. This can be very problematic for the person who has borrowed the loan and for the executor of the deceased’s estate.

We know from experience that informal loans between family and friends can be very problematic when it comes to dealing with the lenders estate after death. However, there are measures that can be taken to prevent problems with managing the estate. These measures are also sensible decisions to make from a legal standpoint.

The Debtor: What Measures Can Be Taken?

Written Agreement

The simplest measure you can take is to create a written agreement between both the lender and the borrower. The agreement should confirm the terms of the loan. The executor of the estate will then find it easier to enforce repayment if they need to.

It’s also sensible to have a written agreement so that both parties are clear about the terms and conditions of the loan to avoid any confusion or disputes.

The Creditor: What Measures Can Be Taken?

Review and Update Your Will

As a rule, you should always review and update your Will regularly when changes in your personal circumstances occur. However, you can also make updates to your Will to reflect any instructions for your executor after you have passed away.

Updates can include documenting an informal loan and the repayment agreement. This makes it easier for their executors to decide how to deal with debts they are covered in their Will.

Alternatively, you can also make specific arrangements in your Will, such as stating that the person who has received a loan will have this amount deducted from any inheritance they are entitled to.

However, unless the Will makes it clear that the beneficiary can keep the loan money in lieu of their share or the executors agree to that arrangement, the loan must be repaid. The borrower then receives their share of the estate in the normal way.

Also, it’s important to remember that owning a Will, or reviewing one, is not only for people over a certain age. Death can happen at any age, at any time. Don’t put off making or updating a Will because you think that you don’t need to due to your age.

How Can A Solicitor Help?

An estate law Solicitor, such as Howells Solicitors, can deal with matters where money has been loaned to family or friends which has left their Wills and estates in a terrible mess after they pass away. We can also help create or amend a Will, and deal with any estate planning instructions.

You can email Howells to make an appointment at enquiries@howellsllp.com, visit our website or call us:

Sheffield0114 249 66 66

Barnsley: 0122 680 51 90

Rotherham0170 936 40 00

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