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Do you inherit debt in Canada?

Posted on 18 August 2022

Written by Colin Boulton

‘Do you inherit debt in Canada?’ is a frequently asked question, particularly if you know one of your loved ones is in financial difficulty. It can be worrying thinking that when they pass, this could become your problem. In fact, it is often difficult enough to manage your own financial situation, let alone focusing on sorting the overwhelming debt that your close friends or family members may be facing. In this article, we explain whether or not you inherit debt in Canada, and what actually happens to your debt when you pass. At Spergel, we understand that losing a loved one is difficult enough without having to contemplate inheriting debt.

Do you inherit debt in Canada?

Simply put, no you do not inherit debt in Canada. This may come as a huge relief to you. No matter which of your family or close friends die, their debts do not pass to you, just as yours will not pass to any of your loved ones when you die. Learn more about ‘does debt transfer to family after death?‘ So, what does happen to debt after you die? Creditors will try to make a claim on the estate of the deceased if they are able to prove that they are owed money. Often, this means that the deceased’s debts must be repaid before any inheritance proceeds can be paid out. This is applicable to mortgages too. One thing to consider is any debts that may have been cosigned or joint. The cosigner will be responsible for the debt if the other cosigner is to pass away. This means that the creditors or collection agencies will try to contact the other debt holder for payment, and will consider them responsible for the debt moving forward. When it comes to credit card debt after death in Canada, your estate and any associated assets will have to first pay off the credit card debt before any beneficiaries will be paid inheritance. If, however, the deceased has no assets upon death, their credit card debts will disappear. Creditors may still try their best to contact you for payments, but there is no obligation for you to pay out. If you are being harassed by collection calls, here is how to stop collection agencies contacting you.

How to avoid inheriting debt

While typically debt is not inherited, there are unfortunately some situations where a debt inheritance can occur – mostly if you were a cosigner on a debt with the deceased. It is tough enough to lose a loved one let alone to consider the legalities behind their estate and repaying debt on their behalf. Here is some of our advice for managing your financial situation to avoid passing on debts to your loved ones when you die.

  • Think twice before cosigning or having a joint debt. Ideally, you would not cosign on a loan that is not yours as you are held responsible for the repayments while not benefiting from the loan itself. Should the other cosigner not make their repayments or pass away, you will have to take on the repayments yourself. If you do cosign for a loan or take on a joint debt, you should take out some life insurance to help make the repayments in case the other cosigner passes away to avoid debt inheritance.
  • Avoid supplementary credit cards. Sometimes, supplementary credit cards can be a good idea for the convenience of a loved one. Other times, however, they can result in some challenging consequences. This could happen if you are a supplementary cardholder and the primary cardholder dies. If the credit card payments are not made, they will become your responsibility and this could result in negative effects on the supplementary cardholder’s credit score. For this reason, they may be best avoided.
  • Take out life insurance. If you want to avoid your loved ones inheriting debt, taking out a life insurance policy could be a sensible step. It often means that debts do not live on past the cosigner’s death. Although nobody likes to think about their death, it is a smart move to protect your family and enable them to get their inheritance. It will also smooth out the process of your estate transitioning over to them.
  • Discuss debt after death. Of course, it is not the most pleasant of topics, but it can be incredibly helpful to have an open conversation about debt after death. Perhaps you all feel the same way, and are not sure how to tackle the issue. Together, you can work on handling the debt and help everyone to feel better about the situation while seeking out debt relief.
  • Be wary of collection agencies. Sometimes, collection agencies can tend to prey on vulnerable survivors of the deceased. They can make them feel as though it is for them to make the repayments, even when it is not the case. You do not automatically inherit debt from your loved ones, unless it was joint or cosigned. Find out more about what happens if you don’t pay a collection agency.
  • Write a will. Creating a will allows you to avoid ambiguity by clearly stating how you would like your estate and assets to be distributed after death. It also ensures you avoid your province’s laws of intestacy, which are the rules that are followed by default if you die without a will. When writing a will, be sure to have it reviewed by a reputable attorney, and create several copies to reference.
  • Give out some inheritance before your death. Something growing increasingly popular in Canada is to give an inheritance before death. This is often because parents would like their children to enjoy the additional funds while they are younger. It means you can see your loved ones enjoying the inheritance while you are alive also. By giving out inheritance before death, it can avoid any potential arguments over the funds.
  • Set up a repayment plan to clear your debt. If you have debt, it is important to clear it as soon as you can. It is a good idea to contact your creditors and see if you can arrange a repayment plan that works for you both.
  • Speak to a Licensed Insolvency Trustee. Licensed Insolvency Trustees are the only professionals legally able to file all forms of debt relief. They offer free initial consultations to review your financial circumstances and recommend an appropriate form of debt relief for you. This could include filing a consumer proposal to reduce your debt by up to 80% while allowing you to keep your assets, or bankruptcy as a last resort to clear your unsecured debt completely.

Actions to take when your loved one passes away

While working on how to avoid inheriting debt before death, there are also some actions you can take when your loved one does actually pass away. By taking the following actions, you can avoid inheriting debt after death.

  • Send the death certificate to creditors. If there is outstanding debt and very little in the way of assets or estate, you simply need to send a copy of the deceased’s death certificate to each creditor. This can essentially write off the debt and should stop them hassling you for repayments. If creditors continue to contact you to say you have inherited the debt, you might need to reach out to a consumer protection agency to make a formal complaint.
  • Put aside some inheritance to pay for outstanding debt. If there is outstanding debt and some assets in the estate, the creditor is able to claim against it in order to recoup their repayment. For this reason, it is sensible to keep sufficient funds aside to cover the repayments so that you do not need to make them from your own money should a creditor be successful in claiming their money back.
  • Seek professional advice. If in doubt, it is always best to consult a professional for advice on how to protect your finances. Many Canadians intend to use inheritance to go towards their retirement funds, so it is important to get it right. A Licensed Insolvency Trustee can help if you or your loved ones are struggling to make repayments on unmanageable debt.

Want to know ‘do you inherit debt in Canada?’ Use our debt repayment calculator to learn more about the debt relief options available to you and your loved ones. At Spergel, we have been helping Canadians gain debt relief for over thirty years, and we are here to help you too. Book a free consultation with one of our experienced Licensed Insolvency Trustees for a review of your financial circumstances and advice on the best pathway for you and your family.

Colin Boulton

Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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