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One of the biggest misconceptions out there at the moment is that debts are written off if/when they die.
You might think that debts are no longer your concern if the worst happens to you, and you’d be right to an extent, but the financial situation you leave behind can have a serious impact on your family.
This is because creditors (the people or companies you owe money to) reserve the right to make a claim against your estate for any debts owed at the time of your death.
For someone who has no dependents and no assets (such as money or property) they’ll be nothing for the creditors to take from.
However, for a person with their own home it could mean that their loved ones can no longer afford to keep the property on.
To make this even more upsetting to your family, if any of your debts are held jointly, it will mean that the other person is now liable to pay 100 per cent of the remaining debt.
This includes the biggest debt you’ll probably ever have had in your life – your mortgage.
Take this example into account: Mr A is a solicitor earning £80,000 per year. His wife Mrs A is a housewife with no income. They have three young children.
Their property was purchased on a joint mortgage of 190,000 and their property is worth £300,000. (Despite the fact that Mrs A does not have an income of her own, she can still be party to a mortgage as her husband’s income covers it).
Unexpectedly, Mr A falls ill and sadly passes away.
In this circumstance Mrs A has the dual grief of losing her husband and now having to pay off a mortgage that she no longer has the money for.
So, as well as losing her husband Mrs A is now in a situation where she and the children are going to be homeless because they cannot cover the debt left behind.
At this stage it must be pointed out that debts are not passed onto your next of kin. The only time a person would be lumbered with your debts on death is if they held the debt with you on a joint basis like in the example above.
This doesn’t mean that debts go away though. In fact it can mean that your next of kin has a lengthy wait before they can take control of your assets.
On death the executor of your estate will work out the value of your assets and if the sum is greater than £5,000 then a process known as probate must be adhered to.
The probate office will set out the terms for how your assets will be distributed and the executor must obtain a grant from the office before they can start to look into financial areas such as bank or savings accounts.
The executor is allowed to withdraw money from the estate to pay for funeral costs. After which they must use the money to pay of secured debts, then unsecured debts before distributing the remaining sum to the person’s next of kin or to the person/persons set out in your will.
So, for example, you might think having £50,000 in the bank will leave your family with a nice living if the worst happens to you, if your debts (including mortgage) are £45,000, all they will actually be getting is £5,000.
A solution which many people overlook , particularly when taking out their mortgage, is how life assurance can alleviate these issues.
Life policies are paid into the estate so the money it can be used to clear the debt, speed up the probate process and leave your loved ones with one thing less to worry about.
In the case of Mr and Mrs A, their policy (if set up correctly to cover the mortgage value) would have meant that the mortgage is paid off and therefore Mrs A would have a property in her possession unencumbered (meaning without debt).