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What happens to debt when you die?

Posted on 12 March 2024

Written by Ashvin Sharma

Death is an inevitable part of life, and although it is a difficult topic to discuss, it is crucial to understand the financial implications, especially concerning debt. In Canada, the fate of an individual’s debt after their passing is determined by various factors, including the type of debt, estate planning, and provincial laws. Like many Canadians, you might be worried that your loved ones could face financial hardship after you die because of your debts. Does your family inherit your debts? Who needs to repay them? How can you protect your family from your debts? In this article, we cover all of these questions and concerns that you might have, and help you to plan how to handle your debts before death. So, what happens to debt when you die?

What happens if you die with debt?

Although we wish it would, unfortunately, your debt does not simply disappear as soon as you pass away. Unless your creditors decide to write off any unpaid debts, they will still want to pursue repayment. Although this is not the best news, the better news is that your loved ones will not automatically inherit your debt. Instead, your estate will settle any of your unpaid debts using your remaining assets. Your family or loved ones will only be responsible for your debts if they are a joint debtor, cosigned on your debt, or guaranteed a loan. When an individual passes away, their estate becomes the focus of settling financial matters. The estate includes all assets and liabilities owned by the deceased. The process of settling these affairs is known as estate administration, and it is generally overseen by the executor or administrator named in the deceased person’s will.

What happens to different types of debt after death?

Different types of debt can impact the estate settlement process in different ways. Here are some common categories of debt and how they are typically handled in Canada:

Secured debt

Secured debt refers to debts like mortgages and car loans. If you pass away and have secured debt (debt associated with an asset), your lender may have a claim on that asset. If you own a home with the mortgage just in your name, your lender cannot ask anyone else to make the payments following your death. Should you hold a secured debt jointly with someone else, the responsibility for payment will automatically go to them following your death. This is often the case with mortgages. Mortgage debt can also become the responsibility of those who inherit the property. If your family wants to keep your property following your death, they will need to take on the responsibility of the mortgage payments. If, instead, they sell the property, they need to pay off the remaining balance using the proceeds. Any transfer of ownership makes the new owner responsible for the debt.

Unsecured debt

Unsecured debt refers to debts including credit card debt, payday loans, and other kinds of personal loan. Unsecured debts are generally paid from the deceased’s estate. If there are not enough assets to cover the debts, they may remain unpaid. Family members are typically not personally responsible for the deceased’s unsecured debts, unless they were co-signers. Should you have a balance remaining on a credit card when you die, if you were the only named debtor on the credit card, the creditor will file a claim against your estate to collect what they are owed. Nobody else would be responsible legally to take on the payments. If you are worried about how credit card debt could affect your family, review your loan agreements to check who takes on responsibility for the balance. The only exception to the handling of unsecured debts after death is student loan debt. After death, the government discharges them.

Joint debt

If you have any kind of co-signed loan or joint credit card with another person, the co-signer or joint account holder will become responsible for the outstanding balance.

Do these rules vary by province?

You should note that the laws governing estate settlement and debt after death can vary by province in Canada. Each province has its own rules and regulations, and you should therefore seek legal advice to understand the specific implications in your region.

Do your beneficiaries inherit your debt in Canada?

No – your beneficiaries do not inherit your debt after your death in Canada. Any remaining debt you have after death will be paid from your assets. Any remaining assets will be transferred to your beneficiaries as part of their inheritance. Not all debts become part of your estate, however. Your beneficiaries may legally need to pay for the following:

  • Joint debts (credit cards, car loan, etc)
  • Co-signed and guaranteed loans
  • Secured debts where the ownership is transferred to a beneficiary

How does your estate deal with your debt?

Your debts need to be settled before your beneficiaries receive any inheritance from your assets. Your executor will pay off outstanding debts in the following order of priority:

  • Taxes owed to the Canada Revenue Agency (CRA)
  • Taxes owed to the provincial or territorial government
  • Money owed to secured creditors, like a car or mortgage lender
  • Money owed to unsecured creditors, like a credit card debt

Once these debts have been satisfied, your executor will distribute the remaining assets (if any) to your beneficiaries.

What if you have more debt than assets after death?

If your estate’s debts are valued higher than your assets, this is known as insolvency. This means there is no way your estate can settle all your creditor’s claims. This means that your creditors will only be able to receive a portion of the money that they are owed. Your creditors will be paid in the priority order shared above, so it could be that some creditors do not receive anything, and others might take everything. If you have insufficient assets to pay off your debts, the executor might need to reduce any inheritance for your beneficiaries in a process known as abatement. This can mean, in some instances, that creditors will take everything, and your beneficiaries will not receive an inheritance.

How can you minimize the financial burden for your loved ones after death?

While for most individuals, families and loved ones will not inherit your debts after you die, there are some exceptions including co-signed debts and those who have accumulated debts that outweigh their assets. Here are a few things you can do to avoid your family having to pick up your debts and to ensure they have something to inherit.

  • Create a will – a will allows you to dictate your financial affairs after death. Without one, the government could decide who gets what and administers your estate.
  • Buy life insurance – if you have a large amount of debt, an adequate life insurance policy could help to protect your beneficiaries so that you have the funds available to cover your debts.
  • Avoid co-signing loans – before entering into a co-signed agreement, consider whether the co-signer could handle the payments should you die. If you are unsure, it is best to avoid co-signing.
  • Get loan protection insurance – this is a life insurance policy that will cover any remaining loan balance you have when you die, up to a fixed figure agreed in your policy. This can protect your assets from your creditors, leaving more for your beneficiaries.
  • Speak to a Licensed Insolvency Trustee – if you have a lot of debt and are concerned about the consequences for your loved ones after your death, book a free consultation with Spergel. Our experts are the only professionals in Canada legally able to file all forms of debt relief, and we have helped over 100,000 Canadians to significantly reduce or completely eliminate their debts.

Is an executor responsible for debt in Canada?

When you pass away, your executor will look after paying off your debts as part of the estate administration process. This involves creating a full audit of your assets, your debts and liabilities (including loans, credit card balances, etc), and they will work to pay off debts and close accounts. Unpaid debts will not be added to your estate in instances when you have joint debts, or if you have a property that is taken over by a beneficiary. Your executor will carry out the following tasks:

  • Creating a list of your debts and liabilities, confirming the amounts and due dates
  • Closing any accounts, notifying creditors that you have died so that your account does not continue to accrue interest
  • Advertise for creditors
  • Pay any debts, including filing your final tax return and paying any owed balances

You might want to be prepared and create a list of your assets and debts or liabilities to store with your will, so that your executor does not have to try and find this information themselves.

What if your executor does not know about a debt that you hold?

If your executor is unaware of a debt that you have and they distribute your assets to your beneficiaries without paying the debt, the creditor of that debt has a right to claim against your estate. In this instance, the executor can be liable and forced to pay the remaining debt from their own funds. This is why advertising for creditors is an important part of the estate administration process. It allows any liabilities you have that the executor may not be aware of to surface. The same case can come about for assets – you may have a bank account that is unknown to your executor. If unclaimed, the assets will go to the government. Creating a full list of your assets and debts for your executor can help to avoid these situations.

How do creditors know that I’ve died?

When you die, an executor will usually advertise for creditors to reduce their own responsibility. This gives any creditors some time to make a claim for repayments that may be owed. If they claim after this fixed timeframe, they might not be able to collect, although the rules around this do vary from province to province. Where this used to take place via an advert in a newspaper, the most common way to advertise for creditors these days is digitally via NoticeConnect. If your executor does not pay your debts, they can be liable to your creditors themselves. 

Understanding what happens to debt when you die in Canada requires careful consideration of various factors. Proper estate planning, knowledge of provincial laws, and seeking advice on debts are essential to ensuring a smooth settlement process and protecting the interests of both you and your loved ones. While it may be a difficult conversation to have, addressing these matters proactively can provide peace of mind for everyone involved. If you are concerned about your debts, and what might happen to them when you die, book a free consultation with an experienced Licensed Insolvency Trustee at Spergel.

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Ashvin Sharma

Ashvin Sharma is a Chartered Insolvency and Restructuring Professional and LIT (Licensed Insolvency Trustee) overseeing all of Spergel's offices in the Greater Vancouver Area and British Columbia. He is also our resident expert on homeownership debt and health debt. In his spare time, Ashvin loves to play sports, spend time with family and friends, and serves as a volunteer coordinator for "Free-Them", a Canadian organization committed to raising awareness about human trafficking.

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