Joint and inherited debt can create complex financial situations, particularly when a person passes away, leaving outstanding debts behind.
Understanding how joint debts operate in the UK is crucial to navigate potential challenges and protect your financial well-being.
What are joint debts?
Joint debts are basically any credit or money agreement that you take out with another person, such as a bank account or loan.
When you take out credit with another person, it’s important to remember that you are both responsible for the whole amount.
It’s never a case that the debt is split evenly and if either of you can’t pay, you both remain liable.
This is what’s known as ‘joint and several liability’ – which means that although the lender cannot pursue you twice for the whole debt, you can both be chased for full payment until the balance has been cleared.
As such, if you are dealing with joint debts after a relationship breakdown, it’s always best to try and come to an agreement for your joint accounts.
This may not always be easy, but if not dealt with properly, they will only escalate and cause you more grief than the relationship did.
Common forms of joint debt
When individuals share financial responsibilities, they may enter into various forms of joint debt.
Understanding these common types of joint debt is essential for navigating shared financial obligations effectively.
Joint loans occur when two or more individuals apply for a loan together, sharing responsibility for repayment.
This can include personal loans, mortgages, or car loans. All parties involved are equally liable for the debt, and failure to make timely payments can impact the credit profiles of all borrowers.
Rent agreements for joint tenants
Rent agreements for joint tenants are prevalent among individuals who share a rental property.
In this arrangement, multiple tenants sign the lease agreement, making them jointly responsible for paying the rent and adhering to the terms and conditions outlined in the contract.
Joint bank account
A joint bank account is a financial arrangement where two or more individuals share ownership and access to a single account.
It is often used by couples, family members, or business partners to manage shared expenses and financial activities.
All account holders have equal rights and responsibilities for the funds in the account, including deposits, withdrawals, and debt obligations.
How can joint debts affect my life?
No one ever plans for money to become a worry or a problem, but life is unpredictable. T
aking on joint accounts or credit agreements is a big decision to make, and it’s important to think about the impact it could have on your life.
Depending on the type of joint debt you have taken on, there can be a number of risks to think about:
Loans or credit agreements
This type of debt leads back to joint and several liability. Regardless of how the money is spent or who spent it, both of you will be responsible for paying the account.
If one of you refuses to pay or becomes unable to pay, this will then fall to the other person.
Bank accounts (including overdrafts)
Putting all your money together into the one pot with another person is something a lot of people do when they decide to live together.
For the most part, this can be a great way to make sure you both pay all your bills and that you can run your household in a fair manner.
But there are potential dangers. If your joint account goes overdrawn, whether through an arranged overdraft or by accident, then you both hold the responsibility for paying it back.
It’s also very easy to get confused about what money belongs to each of you and it’s possible for one side to take money from the other.
As such, it can be easier instead to only have a joint account that is used for bills to be paid. By transferring only what is necessary, it can help to avoid any unwanted struggles.
Credit card debt
Taking out a credit card in joint names is something that isn’t possible in the UK. This is because you can only have one main cardholder who will be responsible for payments.
You can add additional cardholders to your credit card account, and they will be given their own card for spending.
However, this doesn’t make them legally liable for the bill in any way; you simply share the limit together.
Can secured debts be joint debts?
Yes, secured debts can indeed be joint debts. Secured debts are those that are tied to specific assets or collateral, such as a home or a vehicle.
In joint secured debts, multiple individuals are jointly responsible for the debt, and the asset acts as security for the loan.
This means that if the debt goes unpaid, the lender has the right to repossess or foreclose on the collateral to recover the outstanding amount.
For example, a joint mortgage where two individuals are co-borrowers on a home loan is a common form of joint secured debt. Both individuals are equally responsible for making mortgage payments, and the home serves as collateral for the loan.
It’s important to note that joint secured debts carry the same level of responsibility for all parties involved.
If one person defaults on payments, it can affect the credit profiles and financial well-being of all individuals named on the debt.
Joint debts and marriage
It can be a common misconception that once you get married everything money-related becomes joint – including any debts. But this simply isn’t the case.
Joining together in marriage or a civil partnership does not make you automatically responsible for your other half’s finances.
Even if you live together at the same address, anything that is solely in one person’s name will remain solely their responsibility.
This also goes for your credit reports – which will not be merged. However, if one of you is struggling with credit, then both your credit scores could be affected.
What happens to joint debts when someone dies?
When a partner or family member passes, the fate of joint debts depends on the specific circumstances and the type of debt involved.
Here are some common scenarios regarding joint debts after a person’s death:
Joint debts with a surviving co-borrower
If a joint debt has a surviving co-borrower, i.e. you share a joint loan or you’re a guarantor on a credit agreement with the deceased, the responsibility for the debt typically transfers to the surviving co-borrower – in this case, you. You will become solely responsible for repaying the outstanding balance.
Joint debts with no surviving co-borrower
In cases where there are joint debts, but no surviving co-borrower, the debt may still need to be repaid. In such situations, the debt becomes part of the deceased person’s estate.
The creditor may seek repayment from the deceased person’s estate, utilising any available assets to satisfy the outstanding debt.
In some cases, you may inherit debt if you are the beneficiary of the deceased person’s estate, depending on applicable laws and circumstances.
These debts become the responsibility of the beneficiaries, and they may need to settle the outstanding balances using assets from the estate.
It’s important to consult with legal and financial professionals to understand the specific implications of joint debts when someone dies.
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Will life insurance policies cover a deceased person’s debts?
Life insurance policies can potentially be used to cover a deceased person’s debts, depending on the circumstances and the specific terms of the policy.
Here are a few key considerations regarding life insurance and debts:
Beneficiary designation: When a person has a life insurance policy, they typically name one or more beneficiaries who will receive the death benefit upon their passing.
The death benefit is a lump sum paid out by the insurance company.
Allocation of funds: The beneficiaries of a life insurance policy are generally free to use the death benefit as they see fit.
They can use it to cover various expenses, including outstanding debts, funeral costs, or other financial obligations.
Estate liabilities: If a deceased person’s debts exceed the value of their assets and life insurance proceeds, creditors may look to the estate to satisfy the outstanding balances.
In such cases, the life insurance payout may become part of the deceased person’s estate, subject to potential claims from creditors.
Policy terms and exclusions: It’s crucial to review the terms and conditions of the life insurance policy to understand any exclusions or limitations related to debt coverage.
Certain policies may have specific provisions that limit the use of proceeds for debt repayment.
How do I deal with outstanding debts owed by a deceased person?
Dealing with outstanding debts left by a deceased person can be a complex process, but there are steps you can take to address the situation.
Here’s a general guide to handling outstanding debts:
As soon as possible, inform the creditors of the deceased person’s passing. This can be done by providing a copy of the death certificate.
This step helps ensure that communication is redirected and prevents further collection efforts.
Gather necessary documents
Collect relevant financial documents, including bank statements, loan agreements, credit card statements, and any other records that outline outstanding debts.
These documents will be essential for assessing the scope of the debts.
Identify the estate executor or administrator
Determine who is responsible for managing the deceased person’s estate. This may be specified in their will or appointed by the court.
The estate executor or administrator will play a vital role in handling the outstanding debts.
Evaluate the estate
Determine the assets and liabilities of the deceased person’s estate. This includes assessing the value of property, bank accounts, investments, and any other assets that can be used to settle the debts.
Prioritise payment of outstanding debts based on their priority and the available assets in the estate.
Funeral expenses and taxes are typically given priority over other debts.
Seek legal and financial advice
It is important to consult with legal and financial professionals who specialise in estate administration and probate.
They can provide guidance on navigating the specific laws and processes related to outstanding debts.
How to deal with joint debts
If you are struggling with joint debts or are unable to pay your share, there are things you can do to help your situation.
Come to an agreement with your spouse or family members
The best option to deal with joint accounts after separation or divorce is to usually come to some form of agreement.
The impact of not keeping up with payments will affect both of you, so it’s best to try and come to a fair agreement.
Understandably, this can sometimes be difficult if you aren’t on good terms with the other person involved.
In this instance, it’s best to speak to the lender or seek debt advice to find out what options you have.
Make regular payments towards your remaining debt
It’s important to remember that lenders cannot force someone to pay their share of a joint account.
They will, however, expect payments to be made by at least one of you as you will both be considered liable.
In cases where you are left with debts that you didn’t take out – i.e. they were taken out in your name without your knowledge – then it’s important to flag this to the lender as fraud. It’s also important to report this to the police as it can be considered a fraud crime.
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