Debt is part of life. Most adult Canadians have at least some consumer debt, student loan debt, personal loan debt, or mortgage debt. It’s hard to avoid. Dealing with debt isn’t easy and talking about it can be even harder. If you’re worried about your unpaid debts falling on the shoulders of your loved ones if you die, this article is for you. Keep reading to learn about what happens to your debt when you die.
What Happens To Your Debt When You Die?
Your debts do not always go away when you die. They will often need to be dealt with. Your creditors will still want to be repaid what they are owed.
How your debt is dealt with depends on the type of debt and whether someone else is also named on the debt.
What Happens To Your Unsecured Debt When You Die?
If you still carry a big credit card balance, you may be wondering what happens to your debt when you die. Particularly when it comes to unsecured debt.
If the card is in your name only, the credit card issuer will file a claim to get paid via your estate. Any authorized user on your account will not be required to pay your credit card debt.
However, if your credit card account is a joint account, the joint card co-owner will be responsible for repaying the outstanding balance.
What Happens To Your Mortgage Debt When You Die?
If you hold a mortgage with a joint homeowner, such as a spouse or partner. The surviving owner will be responsible for continuing to make mortgage payments when you die.
If you are the sole owner of the mortgage, no one else will be responsible for the loan. It’s important to note, however, that if your family inherits the property and wants to keep it, they’ll need to take over mortgage payments.
Otherwise, they can sell the home. Even then, they’ll need to continue making payments toward the loan until the property is sold. Any debt remaining must then be repaid.
If there is no one to assume the mortgage after you pass away, the bank can foreclose, then sell the home to recoup its losses.
When Can Debt Be Transferred To You (In the Event of Your Parents, Spouse, Or Common Law Partner’s Death)?
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:
- Cosigned loans
- Joint mortgage payments
- Joint credit card accounts
- Supplementary credit cards (if you were a secondary/joint cardholder)
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 become insolvent.
What If My Debts Outweigh My Assets?
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 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.
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How Your Debt Affects Your Estate, Your Executor, And Your Beneficiaries
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.
Do You Have A Will?
If you manage to make a will before dying, anything you leave will be divided among any family, friends, or other parties that you’ve named as beneficiaries. 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 “intestate” 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.
What Is Your Estate?
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.
Who Is An Executor?
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:
- Contact the company or legal representative who safeguards your will
- Get your assets and possessions appraised
- Make funeral arrangements
- Open a bank account for the estate
- Redirect or cancel any mail, memberships, or licenses in your name
- Collect any income earned by your estate assets or accounts payable
- Apply for probate (if required)
- Handle any expenses that come out of the estate (taxes, debts, etc.)
Who Is A Beneficiary?
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.
What Is Probate?
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.
How Can I Prevent My Loved Ones From Inheriting My Debt?
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. However, if you have debts that your spouse, parent or friend have co-signed, they will be held liable for the debt.
So, if possible, it’s best to take some of these precautionary measures before you die:
Purchase Life Insurance
If you tend to incur a lot of debt and you have an estate for your beneficiary, then a life insurance policy can be worth the investment. That way, your dependents/beneficiaries (spouse, children, etc.) will be covered. And a portion of the payout they receive can be used to consolidate any outstanding debts.
To get the best premiums, you should apply when you are young and healthy. The older you get the more expensive life insurance becomes. Having a healthy credit score can also help lower premiums. This is because many insurers will check your credit score when determining your risk level.
Get Your Will In Order
Creating a Will is one of the best ways to see that your loved ones are treated fairly afterward. Otherwise, your remaining properties will be subject to your province or territory’s laws of intestacy. This is what happens when you don’t name any beneficiaries. Be sure to choose a trustworthy friend or family member to act as your executor.
Get Loan Protection
If you don’t want the money to come out of your estate, you can always purchase a loan protection insurance plan. Although it can cost extra, it can cover your debts in the event of your death. That way your entire estate can go to your loved ones.
Seek Legal Counselling
Another way to give your beneficiaries and assets some added protection is to hire a lawyer who specializes in wills, trusts, and estates. While professional legal advice can be a bit pricey, it can also be worth the investment, as it puts less stress on your loved ones after you’re gone.
Know Your Rights
A lawyer can also teach you and your loved ones about what creditors and debt collectors are legally allowed to do if you die. Remember, the money you owe could be withdrawn from your estate, but they cannot demand payment from a beneficiary or executor unless they’re a co-borrower.
Even if that’s the case, creditors are not permitted to threaten them or contact them outside of specific hours. Make sure your loved ones are aware of your attorney so they can get all the advice they need. If necessary, they can also produce a death certificate when creditors or debt collectors come knocking.
Bottom Line: Debt After Death
Life insurance and creating a will are two things you can do to protect your family from losing their home in the event you pass away. Life insurance can help your family settle any debts you have and provide them with a lump sum of cash for living expenses. A will can also help ensure that the people you want receive your inheritance.