Secured VS Unsecured Loans in Estate Administration

November 2024

Winding up an estate after a death takes time. This is because it can be a very involved job, especially if the person who has died had not got their affairs in order in advance. The first stage of the job is generally to carefully assess the situation. The second is to pay off any creditors.

Who an estate’s creditors are is something that should become clear in the process of assessing the finances of the estate. The type of creditors involved – and the scope of what is owed – can vary hugely. In many situations, this task will simply be concerned with paying final utility bills. In others, there may be far more significant debts to address.

The personal representatives of the estate will need to ensure that all debts have been paid before they can start distributing any part of the estate to beneficiaries. They should also be aware that not all types of creditors are considered equal in the eyes of probate law, and that it is best practice to pay some types of debts before others. When you are administering an estate, you should always prioritise paying off secured loans over unsecured loans.

What is the difference between secured and unsecured loans?

If you’re not familiar with the terminology, the question of whether a loan is considered to be ‘secured’ or ‘unsecured’ depends on whether or not some form of collateral is involved.

Secured loans require the borrower to put up something as security for the lender. This will be some kind of existing asset, such as a house, a car or even artwork or other high value items. If the borrower does not keep up with repayments on the loan, the lender will have the right to repossess the asset that was offered as security. Key examples of secured loans are mortgages and vehicle purchase loans, where the property or vehicle that are being purchased also act as collateral for the loan.

With an unsecured loan, the lender does not require an existing asset to be offered as collateral. Loans that fall into this category include credit card bills and some lower value personal loans.

What difference does this make?

If you’re responsible for administering an estate, it’s important for you to familiarise yourself with which of any outstanding debts are secured versus unsecured.

This is important because there is a specified order in which debts need to be paid off, and secured loans should always be paid off before unsecured loans. In practical terms, this means that if the estate you are responsible for still has a mortgage or vehicle loan outstanding, these will need to be addressed before anything else, including phone bills, credit cards and personal loans. Depending on the status of the estate, this may well necessitate selling property or vehicles in order to raise the necessary funds.

Though selling property can take a great deal of time, technically speaking you should not pay off any other debts until the sale has been completed and the secured loans have been addressed. This can be difficult, especially if there are creditors putting pressure on you.

Why is this?

Debt cannot be inherited in the UK, though this does not simply mean that an individual’s debts are written off on their death. Most types of debt will need to be paid from the estate, but only as long as the estate can afford to do so.

It is not unusual for there not be enough money (or value from other items such as property, vehicles or jewellery) in an estate to allow all its debts to be paid off. In these situations, personal representatives will need to prioritise which debts should be paid.

There is a very practical reason for the law to specify that secured debts must be paid first. For example, if the personal representatives failed to pay any remaining balance on a mortgage, the mortgage company in question could then repossess the house, leaving even fewer assets in the estate to pay off other creditors.

So long as creditors have been paid off in the correct order, once the estate assets run out, any remaining debt will usually be wiped out. Neither the personal representatives nor the beneficiaries will become personally responsible for this.

However, it is wise to get professional advice in these situations, as there are exceptions. This is particularly likely to be the case for any jointly-held debts, which are usually inherited by the surviving party. Specialist legal advice can also help personal representatives to ensure that they will not be held personally liable for any unpaid liabilities.

It’s important to understand that if an estate cannot afford to pay off the entirety of its debts, that the beneficiaries will not be able to inherit any money or assets from that estate, even if there are specified bequests in the Will.

You can read more about the management of insolvent estates and the correct order of priority for creditors here.