Contemplating what Happens to Your Debt When You Die in Canada may be a morbid topic, but it’s also an important one.
Like most people, you may be concerned that your debts could place severe financial hardship on your loved ones after you pass away. Will your family inherit your outstanding debts? Who’s responsible for paying them off? Can creditors still legally pursue you or your beneficiaries for payment? What steps can you take to minimize the financial burden for your family?
In this article, we’ll answer all these questions to give you peace of mind about this emotional topic and help you create a plan for dealing with your unpaid bills and debts.
What happens if you die with unpaid debts?
Unfortunately, your debts simply don’t simply vanish when you pass away in Canada. Unless your creditors choose to write off what you owe, they will still wish to collect payment.
However, the good news is your loved ones won’t inherit your debt. In Canada, your debts don’t transfer to your beneficiaries after you die. Instead, your estate will settle your outstanding debts using your remaining assets. They would be responsible for taking on your debt obligations only if they are a joint debtor or co-signed or guaranteed a loan contract.
What happens to your credit card debt and other unsecured loans?
Let’s say that a sizable balance remains on one of your credit cards after you die. If you were the only one who signed the card agreement, the creditor will file a claim against your estate to collect the money owed. No other person would be legally responsible for taking over payment obligations, as they never entered into the credit card contract.
However, if the credit card is ajoint debt, the joint cardholder will automatically be liable for repaying the balance.
What if you allow another individual to use your credit card or provide them with a duplicate card to use? In general, additional authorized users would be absolved from making payments on your behalf, as the account strictly belongs to you.
However, some contracts make the primary borrower (you) and supplementary borrower equally liable for the balance on all credit cards under the account. Or, the supplementary borrower may be responsible for charges on the duplicate card only.
If you’re concerned about how credit card debt may affect your family or beneficiaries, review your cardholder agreement to verify who bears responsibility for the outstanding balance.
The rules surrounding liability for unpaid debts on credit cards also apply to other unsecured debts, such as lines of credit and installment loans. The only exception is federal student loans:the government will discharge them should you die.
What happens to your mortgage and other secured loans
If you own a home with mortgage debt solely in your name, your lender cannot ask anyone else to resume payments after your death.
However, suppose you hold the debt jointly with another person, such as your spouse. In that case, the payment responsibility will automatically transfer to them. This scenario is relatively common among couples as they typically purchase a home together, which means both individuals sign the mortgage contract.
In addition, mortgage debt can become the legal obligation of those who inherit the home. If your family wishes to keep the property after your passing, they must assume responsibility for the mortgage payments. Should they choose to sell the property, they’ll still need to use a portion of the proceeds to pay off the remaining balance. If your family decides not to keep the home, the mortgage lender can repossess it.
Regarding mortgages, car loans, and other secured debts,the outstanding balance stays attached to the asset. A transfer of ownership results in the new owner being liable for the remaining debt.
Will your beneficiaries inherit your debt?
No, your beneficiaries won’t inherit your debts in Canada after your death. Your estate will pay out any outstanding debts to your creditors using your assets. Anything remaining assets will be transferred to your beneficiaries as part of their inheritance.
However, not all debts become part of your estate. Your beneficiates may become legally obligated to pay for the following:
- Joint debts (credit card debt, mortgage, car loan, etc.)
- Co-signed and guaranteed loans
- Secured debts where ownership of the underlying asset (such as a home) transfers to a beneficiary
Below is an overview of how your estate will handle your debts.
How your estate deals with your debts
Before your beneficiaries receive any inheritance from your estate’s assets, your creditor’s debt claims must be satisfied. Your executor will pay down outstanding debts in the following order (certain creditors have priority over others):
- Taxes owed to the Canada Revenue Agency (CRA)
- Taxes owed to the provincial or territorial government
- Money owed to general secured creditors, such as a mortgage lender
- Money owed to general unsecured creditors, such as credit card companies
After paying off all debts, your executor will distribute the remaining assets to your beneficiaries.
What if you have more debt than assets?
If your estate’s debts exceed the value of its assets, it’s insolvent, as there’s no way it can satisfy all creditors’ claims. As a result, your creditors will only be able to recoup a portion of the debts owed.Some may receive nothing, as higher-priority debtors may take everything.
If your estate has insufficient assets to cover debts, the executor may need to reduce any gifts in your will to your beneficiaries through a process calledabatement. Unfortunately, if your debts are large enough, some jurisdictions allow creditors to take every last dollar, so your beneficiaries won’t receive any cash or assets.
Tips for minimizing the financial burden for your family after death
Although, in most cases, your loved ones won’t inherit your debts when you die, there are exceptions where they may be liable, such as joint debts. Also, if you’ve racked up considerable debt over the years, it could be enough to wipe out your estate’s assets, leaving nothing for your beneficiaries.
Here are a few safeguards you can put in place so you don’t leave your family battling debt collectors and struggling financially to get by.
Create a will. A will is a vital tool in estate planning, as it gives you the power to dictate your financial affairs after your death. Without a will, your estate will be at the mercy of your province’s intestacy laws, meaning the government will decide who gets what and who administers your estate. The process can be tedious and frustrating for your beneficiaries; crafting a will can ensure they avoid it.
Purchase a life insurance policy. If you’ve accumulated a large sum of debt, consider taking out a life insurance policy could be a worthwhile investment. By doing so, your beneficiaries will have enough money to cover your estate’s debts.
Avoid co-signing loans with beneficiaries. Before asking a family member to co-sign a loan or enter into a joint loan agreement, consider whether they can handle the payments should you die unexpectedly. If you suspect they would struggle to keep up, it’s best to avoid saddling them with extra debts. Regarding co-signed or joint debts with family members, strive to pay off the balance as soon as possible so they’re left with no further obligations.
Get loan protection insurance. These life insurance policies will cover your remaining loan balance should you pass away, up to a maximum amount outlined in your policy. For example, mortgage life insurance will pay off your mortgage balance. The money doesn’t come from your estate. Instead, the insurance company will pay your creditor directly, leaving more assets for your beneficiaries.
Seek legal advice. Hiring a lawyer specializing in estates and wills can be valuable if your financial situation is complex. They can help you structure your estate in the most beneficial way possible. And they can inform you and your family about legal rights regarding debts and debt collection.
Final Thoughts on what happens to your debt after death
In Canada, we’re fortunate that debts don’t transfer to surviving family members through a deceased person’s estate. If your debts are solely in your name, your executor will pay them through your estate and distribute the leftover assets to your beneficiaries.
Still, your unpaid debts can lead to a stressful situation for your family. Depending on your circ*mstances, you risk leaving behind many co-signed loans and joint debts they will be liable for.
If you’re looking for a way to ease the financial burden for your household, get in touch with aLicensed Insolvency Trustee at . Our trustees will help you weigh all your debt relief options, explain your rights, and help you implement a strategy to resolve your debts. Book your free, confidential consultation today and make a decision your future self will thank you for.
