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Worried about whether your unpaid debts will fall on the shoulders of your partner, children, parents, or other beneficiaries once you’ve died?
Before we can answer this question properly, it’s important to learn about what happens to your finances after you’ve passed on. Actually, much of that depends on whether you were able to establish your will prior to dying.
An estate is a legal entity that’s separate from yourself, wherein all your assets and liabilities are transferred after you’ve died. In other words, it’s the properties and possessions that you own or have a legal investment in.
If you manage to make a will before dying, anything you leave can then be divided among any family, friends, or other parties that you’ve named as beneficiaries within. Hopefully, you’ll also have named one or more executors so they can make sure the terms of your will are met.
However, if you don’t have a will or leave any instructions as to what should be done with your possessions, the government of your province or territory will typically declare that you’ve died “interstate” and set their own terms for the post-death financial process. Whatever you’ve left will then pass to your next of kin.
If you don’t have any next of kin, the government will simply assume your estate, including any income or debts it has generated.
As mentioned, an executor is a person that you’ve chosen to review the conditions of your will and see that they are being met. Although one of their primary tasks is to distribute any properties to their rightful beneficiaries, the executor must also:
As the title suggests, a beneficiary is anyone that stands to inherit whatever money or properties you’ve left for them. While it can often take several months, maybe even years for an executor to arrange every aspect of your will, your beneficiaries are legally entitled to collect their inheritance as soon as it’s available.
Your beneficiaries will also be notified if the case goes to probate, which is a legal court process wherein your will is validated and your executor is officially elected. During these proceedings, beneficiaries can challenge the terms of the will and object to any executors or other beneficiaries listed within.
Related:
If you have an executor, it’s also their duty to reach out to your creditors and deal with any outstanding debts you left behind. Normally, the funds to cover those debts will come straight out of money your estate assets have generated. However, a slightly different process could ensue if your assets are insufficient.
Unfortunately, if your debts are large enough, the estate may be subject to the provincial or territorial laws that allow your creditors to drain every penny of it as compensation. Although this means your beneficiaries will not receive any of your assets or possessions, at least the money will not come from their own pockets. In fact, no one you know will be responsible for your debts unless they’re listed as a cosigner.
Learn how to remove yourself as a cosigner on a loan.
Thankfully, the same principle applies to any debts that your loved ones incur. So, even if a parent, spouse, or common-law partner has a lot of unpaid debt when they die, their creditors can only go after the money in their estate, unless you’re a co-borrower.
That said, if you’re one of the beneficiaries of their estate, it can feel like you’re paying for their debts, simply because whatever inheritance they left you may be deducted to pay back their creditors, who will likely ask for payment no matter the circumstances.
Under normal circumstances, unpaid debts cannot be transferred to you, despite whatever relationship you had with the deceased. Nonetheless, there are some debts that you could be stuck with when a parent, spouse, or common-law partner passes away, including but not limited to:
Essentially, you will only be responsible for someone else’s unpaid debt if you signed a contract with them originally. Otherwise, all debt payments will come directly from the deceased person’s estate assets. If there isn’t enough money there to satisfy the creditor(s), the estate can file a consumer proposal or declare bankruptcy instead.
In Canada, we’re fortunate to have laws that prevent creditors from transferring the responsibility of our debts to those we leave behind when we die unless of course they willingly agreed to be a cosigner beforehand.
Nevertheless, there are some creditors and collection agencies that will try to hold your loved ones accountable and do anything to make up for their losses. So, if possible, it’s best to take some of these precautionary measures before you die:
If you’re currently struggling to keep up with your monthly debt payments, Loans Canada can help. We can connect you with credit counsellors, Licensed Insolvency Trustees, and other debt management specialists in your area.
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