Do your debts die with you?

Rachel Grant and Jane Henderson explain the implications for the executor of an estate with debts unpaid.

This is a question that does arise, particularly after the death of a spouse, partner or family member who was known to have had financial difficulties. Will those left behind be responsible for the debts? The answer is: no.

When a debtor dies, no one else can be required to pay their debts, unless that person was jointly liable for the debt, for example, a joint loan. However, if the person who died with debts also had assets, those assets must be used to pay the debts before beneficiaries can receive anything. 

Paying off debts from the estate

The person who has responsibility for administering the deceased's estate is the executor. In Scotland, before the executor can deal with the estate, including paying off debts, they must ‘confirm’ to the estate by making an application to the Sheriff Court where the deceased was last resident, and by providing a list of all the deceased’s property at the time of death.

Once appointed, as well as ingathering the estate, the executor must take reasonable steps to ascertain any debts due by the deceased. Well-established practice is that an executor will wait six months after the date of death to allow for any creditors to intimate their claims before making payment to beneficiaries.

What if the debts exceed the assets?

If the assets of the deceased’s estate are insufficient to meet the liabilities, the estate is insolvent and the executor should cease dealing with the deceased’s property.

Once an executor becomes aware that the estate is insolvent, they will not have title to deal with the assets and should apply for the estate to be sequestrated (in Scotland, the transfer of a debtor's estate to a trustee). Also, anyone who is entitled to be appointed as an executor (even if not actually appointed) can apply for sequestration of an insolvent estate.

Until recently, an executor, or a person entitled to be appointed as an executor, had to petition the court for sequestration, whereas now, the application is made to the Accountant in Bankruptcy (AiB), the Scottish equivalent of the English Insolvency Service, which is an agency of the Scottish government. An application to sequestrate a deceased’s estate will proceed in much the same way as a debtor application.

What can a creditor do?

As well as the executor, or a person entitled to be appointed as an executor, a creditor owed at least £3,000 can apply for the sequestration of a deceased’s estate. This is done by petitioning the court, rather than applying to the AiB.  

While an executor or person entitled to be appointed as an executor can apply at any time, unless the apparent insolvency of the deceased was established in the four months prior to death, a creditor must wait until six months after the death of the debtor before presenting a petition for sequestration.

Once sequestration of the deceased’s estate has been granted, matters will proceed in much the same way as any other sequestration. The trustee will ingather assets and then settle liabilities, making payments in line with the statutory order of priority. The only difference when dealing with a deceased’s estate is that funeral deathbed and funeral expenses reasonably incurred will be given a preferential ranking, and will be paid after the trustee’s remuneration and outlays, but before the petitioning creditor’s costs and creditors’ claims.

In England and Wales

By way of contrast, in England and Wales, the estate should be administered under the provisions of the Administration of Insolvent Estates of Deceased Persons Order 1986, and an application made to the court for an insolvency administration order.

Where the deceased’s legal personal representatives apply, the order is equivalent to a debtor’s own petition and, where a creditor’s petition is presented, the insolvency administration order is similar to a bankruptcy order.

About the author

Rachel Grant is a partner, and Jane Henderson is a solicitor, in the corporate restructuring and insolvency team at Brodies LLP.

See also: Promissory notes, personal representatives and probate