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Creditor

Also known as: Estate Creditor, Debt Holder

Definition

A creditor is a person or organization to whom the deceased owed money at the time of death, and who has a legal right to claim payment from the deceased's estate.

Understanding creditors is crucial because they must be paid before beneficiaries receive inheritances. This affects how much your loved ones will ultimately receive from your estate.

What Does Creditor Mean?

Under English and Welsh law, a creditor is anyone the deceased person owed money to when they died—including banks, businesses, HMRC, and individuals. The Administration of Estates Act 1925 establishes that estate assets are "assets for payment of debts and liabilities," meaning executors must pay legitimate creditor claims before distributing inheritances to beneficiaries.

Creditors fall into two main categories: secured creditors (holding legal charges over specific assets, like mortgage lenders) and unsecured creditors (with no security, like credit card companies). Secured creditors have first claim on the assets they hold charges over, while unsecured creditors must wait for payment from the general estate funds.

When someone dies, the executor must identify all creditors, notify them of the death, and pay valid claims in the correct legal order. To protect themselves from personal liability for unknown creditors, executors can place a Section 27 notice—a statutory advertisement published in The Gazette and local newspapers. This gives creditors two months from publication to come forward with claims. After this period, the executor is protected from personal liability for unknown creditors, though those creditors can still pursue beneficiaries who received distributions.

Sarah's estate illustrates how this works in practice: she died with a house worth £280,000, a £150,000 mortgage (secured creditor), £30,000 in credit card debt (unsecured creditors), and £8,000 in savings. The mortgage lender gets paid first from the house sale, but the credit card companies can only claim from the £8,000 savings—leaving her estate insolvent with unsecured creditors receiving partial payment.

Common Questions

"How long does a creditor have to claim against a deceased person's estate?" Creditors have two months from the date of a Section 27 statutory advertisement published in The Gazette to make a claim. Without such notice, the general limitation period is six years from the date of default, though in practice claims are usually made within six months of death.

"Am I responsible for my deceased relative's debts?" No, you do not inherit debt in the UK. You're only responsible for a deceased person's debts if you had a joint loan or agreement with them, or if you acted as a guarantor. Individual debts must be paid from the deceased's estate, not by family members personally.

"What happens if the estate can't pay all the creditors?" If the estate is insolvent (debts exceed assets), debts are paid in a specific legal order of priority. Secured debts and funeral expenses are paid first, followed by preferential debts, then unsecured creditors. Some creditors may receive only partial payment or nothing at all.

Common Misconceptions

Myth: When someone dies, their debts are automatically written off and disappear.

Reality: Debts do not die with the deceased person. Creditors have a legal right to claim payment from the estate, and executors must pay legitimate debts before distributing inheritances. The Administration of Estates Act 1925 establishes that estate assets are "assets for payment of debts and liabilities."

Myth: If my parent dies with credit card debt, I'm responsible for paying it off from my own money.

Reality: You do not inherit personal liability for individual debts unless you had a joint loan or account with the deceased, or acted as a guarantor. Creditors claim payment from the estate's assets, not from family members. If the estate has insufficient assets, the unpaid portion is written off—creditors cannot pursue family members for individual debts.

  • Debt: The financial obligation that creditors hold against the estate.
  • Estate Liabilities: The broader category including creditor claims, taxes, and expenses.
  • Executor: The person responsible for identifying and paying creditors.
  • Insolvent Estate: When creditor claims exceed available assets.
  • Statutory Advertisements: Section 27 notices protect executors from unknown creditor claims.

Need Help with Your Will?

Understanding how creditors are paid ensures realistic expectations for your beneficiaries. Knowing debts are paid first helps you make informed decisions about executors and estate distribution.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.