Most adult Canadians have some form of debt, whether it’s a mortgage, credit card, car loan, or student loan. But what happens to your debt when you die? The thought of leaving behind a financial mess for loved ones can be a significant source of anxiety.
This is an uncomfortable topic many don’t want to think about, but understanding how your debts are handled is a critical part of responsible estate planning. This guide provides a clear overview of how debt is managed after death in Canada, helping you take the right steps now to protect your family’s future.
What Types of Debt Can Be Transferred to Your Loved Ones Upon Your Death?
When you pass away, most of your unpaid debts won’t simply disappear. Creditors and lenders have a right to collect what they’re owed. However, there are only a few scenarios where your debts can legally transfer to and become the responsibility of your surviving loved ones after you’re gone:
Joint Debts
If you hold a joint debt like a mortgage, car loan or credit card with a co-borrower, they remain responsible for repaying the outstanding balance, even after your death. For example, if you and your spouse jointly hold a mortgage, your spouse would need to continue making payments. The same is true for joint credit card accounts.
Co-Signed/Guaranteed Loans
If you co-signed for someone else’s loan or guaranteed their debt, you’ve legally agreed to be responsible if they fail to repay it. This arrangement doesn’t end when you die – your co-signees or beneficiaries must continue making payments on the debt.
Secured Debts Where Asset Transfers
Secured debts like mortgages and car loans stay with the asset. If that asset gets passed to one of your beneficiaries, they acquire the debt as well. For example, if your heir inherits your home, they’d have to assume the mortgage.
In all other cases, your unpaid debts die with you and can’t be transferred to loved ones. Creditors can only collect from your estate.
What Happens to Unsecured Debts When You Die?
Unsecured debts, such as credit cards and personal loans, are not tied to an asset and generally don’t transfer to others after you’re gone. What happens to them depends on whether you were the sole account holder or had a co-borrower.
Sole Account Holder
If you are the only person on the account, the creditor or debt collector would file a claim against your estate to collect what they are still owed. They cannot make your family members pay it directly.
Your executor will then pay the claim using your estate’s assets, assuming sufficient funds exist. If there is a shortfall, the creditor may only receive partial compensation or none at all if assets are completely depleted.
Joint Account Holder
However, if you held a credit card or unsecured loan account jointly with another person, the situation differs. Types of joint accounts include:
- Spouses or partners with joint credit cards or loans
- Parent and adult child as co-borrowers
- Friends or family members who co-signed an account
With joint unsecured debts, the surviving co-owner remains liable for the balance owed. The creditor can legally require them to continue repaying the debt in full, even after you pass away.
The key distinction is that with joint unsecured accounts, your co-owner actively agreed to shared responsibility by signing the loan or credit contract along with you. Creditors can still pursue repayment from them based on that original agreement.
So, while your estate handles debts that were solely in your name, joint account holders must directly deal with that creditor and cannot default just because the other party died.
The same rules apply to other unsecured debts like personal loans, lines of credit, and private student loans. Your authorized users and beneficiaries are generally not liable unless they co-signed the loan agreement.
What If Your Debts Are More Than Your Assets?
When you die, your executor takes stock of your assets and outstanding debts to settle your estate. Creditors who are owed money will file claims demanding repayment from the estate. This is the scenario where things become complicated. If your debts exceed your assets, your estate is declared insolvent.
Here’s what happens:
- Priority of payments: Not all debts are treated equally. By law, certain debts must be paid first. The payment order is generally: funeral expenses, executor/legal fees, taxes owed to the Canada Revenue Agency (CRA), secured debts (like mortgages), and finally, unsecured debts (like credit cards).
- Partial repayment: Unsecured creditors will likely only receive a percentage of what they are owed, or potentially nothing at all.
- No inheritance: In most cases of insolvency, the beneficiaries will not receive any inheritance, as the assets are entirely used to pay off creditors.
Although this is a worst-case scenario, insolvency is possible if you accumulate substantial debt. The larger your debts compared to your assets, the greater the likelihood that your beneficiaries will be left with nothing.
If excessive debts are making you anxious about leaving financial chaos for your family, take steps now to remedy the situation. Here are nine options if you currently have more liabilities than assets:
- Debt consolidation loan – Roll multiple debts into a single loan at a lower interest rate to pay off sooner.
- Bankruptcy – Discharges certain debts under a court-supervised process.
- Consumer proposal – Creditors accept lower repayments to satisfy debts.
- Borrowing from RRSP – Permanent withdrawal to pay high-interest debt.
- Debt management program – Credit counselling agency negotiates lower payments.
- Budgeting and extra payments – Free up money in your budget and make additional payments to knock down balances.
- Refinancing a home – Access equity to consolidate other debts.
- Hardship programs – Temporary relief for mortgages and other loans in arrears.
- Part-time income – Take a side job to bring in extra income for debt repayment.
The key is to contact a credit counsellor or debt specialist, such as a Licensed Insolvency Trustee, who can review your complete financial picture. They can present debt relief options tailored to your specific circumstances.
How to Minimize the Burden on Loved Ones
While debts usually can’t be directly transferred, large unpaid debts can still wipe out your estate and leave your family with nothing. Here are eight options to consider that can minimize the stress and financial responsibilities placed on your loved ones:
Create a Will and Name an Executor
Having a will prevents your estate from going into probate in Canada and saves your family significant time and legal fees settling your affairs after you’re gone. You can name an executor to ensure your debts are properly addressed and assets are correctly distributed to beneficiaries.
Purchase Life Insurance
If you have a sizable amount of debt, life insurance provides an instant source of funds after your death that can be used to repay debts and avoid draining your estate. Your beneficiaries will receive the payout to settle accounts.
Avoid Co-Signing Loans
Think twice before co-signing a loan for someone, as this responsibility does not end if you pass away before the debt is repaid. You could unwittingly burden a co-signer.
Pay Off Joint Accounts ASAP
If you share any joint loans or debts with someone, make an effort to pay them off as quickly as possible. This eliminates creditor claims against a surviving co-owner after your death.
Get Loan Protection Insurance
Consider loan protection or credit insurance that repays specific debt balances upon death, such as mortgage life insurance. This prevents having to draw repayment funds from your estate.
Consult With Legal and Financial Experts
Meet with qualified estate planning lawyers and financial advisors. They can help structure your assets and debts to properly provide for beneficiaries and avoid unnecessary taxation or claims.
Share Important Documents and Passwords
Make sure your executor and loved ones can access important financial and legal documents after your death. Provide login details for accounts, but avoid sharing passwords with beneficiaries who should not access certain accounts.
Explain Collections Rights to Beneficiaries
Inform loved ones of their legal rights regarding creditors and debt collectors so they avoid harassment or abuse. Share appropriate legal resources.
The right preparation can give you peace of mind that your financial legacy after death will protect rather than unduly burden the loved ones you leave behind.
How an Executor Settles Your Debt After You Die
When you pass away, your unpaid debts become the responsibility of your estate, which your executor oversees. As part of probating your last will and testament, the executor has several duties related to debt repayment:
- Locate debts – Review records and account statements to compile a list of liabilities. May need to search the home office and safe deposit box.
- Notify creditors – Alert all creditors of your death and close open accounts. Request final account statements.
- Pay claims – Use estate assets to pay valid claims from creditors. Maintain detailed records.
- Notify credit bureaus – Inform Equifax and TransUnion in writing to prevent identity theft.
- Advertise for claims – Publish notices giving creditors a limited time to file claims against the estate.
- Prioritize payments – Determine payment orders based on priority. Taxes and secured debts come before unsecured debts.
- Calculate insolvency – If debts exceed assets, calculate the percentage of creditors that will be repaid.
- Distribute inheritance – Transfer any remaining assets to beneficiaries after debts are paid.
Your executor has a fiduciary duty to manage the repayment of debts in the estate’s best interest. Creditors also have rights, such as filing legal claims and contesting a will if they believe improper asset transfers occurred to avoid debts.
The Bottom Line
It’s distressing to think about what will happen to your finances and debt obligations after you’re gone. While debts that solely belong to you usually die with you, large unpaid debts could wipe out your estate before anything is passed to your loved ones.
With proper planning through life insurance, co-signer agreements, and clear executor instructions, you can reduce the potential burden on your family. Most importantly, understand that your beneficiaries shouldn’t be held responsible for your debt as long as they didn’t sign their name on any loans or agreements.
FAQs related to What Happens to Your Debt When You Die in Canada
How are my debts handled if I die without a will?
If you die without a will, your estate goes into probate where the government oversees settling your affairs and debts. This can be a lengthy, expensive process for your loved ones. Having a will can streamline debt repayment and asset distribution by naming an executor.
What debts remain unpaid at death besides credit cards?
Common debts that remain after death include mortgages, car loans, medical bills, personal loans, utilities, cell phone contracts, and taxes owed. Joint and co-signed accounts also continue needing repayment.
Can creditors force my family to sell their home to pay my debts?
Generally no, creditors cannot force your beneficiaries to use assets like a home they inherit to pay your debts. They can only make claims against your estate. But if heirs want to retain an asset with debts tied to it, they take on associated repayment obligations.
How soon after death do creditors need to be notified?
Letting creditors know quickly allows them to cease interest and fees accrual on accounts. Your executor should notify them using a copy of the death certificate within 1-2 months. Account holders' names should also be changed with credit bureaus.
Can creditors go after my spouse for my sole credit card debt?
No, a creditor cannot compel your spouse or next of kin to pay debts solely in your name after death. They can only make claims against the assets of your estate, not individuals unless they co-signed accounts with you.
What should I include in a will to ease debt burden for family?
Name an executor, specify gifts/assets distribution, provide funeral instructions, identify guardians for dependents, and authorize powers to address finances/debts. Also consider life insurance to provide funds for large debts
