The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
What Happens To Your Debt When You Die?
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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?
The Estate, The Executor, And The Beneficiaries
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.
How to financially deal with the death of your spouse, click here.
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.
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.
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?
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.
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 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.
Can You Inherit Your Parents, Spouse, Or Common-Law Partner’s Debt?
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.
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 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 file a consumer proposal or declare bankruptcy instead.
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 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:
- Purchase life insurance – If you tend to incur a lot of debt and your estate is your beneficiary, then a life insurance policy can be worth the investment. That way, your dependents (spouse, children, etc.) will be covered and a portion of the payout they receive can be used to consolidate any outstanding debts.
- Get your will in order – Even if you’re not expecting to die, 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, which 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.
- Set up an automatic repayment plan – If you don’t want the money to come out of your estate, you can always establish a plan through your bank that would automatically repay your debts if you were to die unexpectedly or become too ill to take care of them by yourself. Although it can cost extra, you might also want to consider things like balance protection insurance for your credit cards.
- 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 with debt. 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.
Need Help Managing Your Debt?
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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