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Inherited Debt

It's a sad but true fact that many people are concerned about what will happen to the outstanding debts of a friend or loved one when they pass away.
Millions are already worried about debt of their own without worrying about being legally obligated to deal with another person's debt when they die, so it's important to know your rights and how to handle this situation if it arises.

Can you inherit debt in Canada?

In short, no, you can’t inherit debt in Canada. If your parents, partner or children pass away you will not be held responsible for any debts they owe, nor will your debts be passed to someone else should you die.

So what happens to debt when a person dies?

Creditors can make a claim on a deceased person’s estate if they can prove they are owed money and the debt that was in that person’s name only. This means that any debts owed to creditors must be paid before any inheritance is paid to a surviving spouse, family or beneficiary.

However, the same rule doesn’t apply to joint debt. Any debt owed through a joint or co-signed account becomes your responsibility if the other co-signer passes away. If you have joint debts or a joint loan you will be legally responsible for the remaining debt.

How does a creditor know a person has passed away and what right do they have to collect on debts?

While creditors don’t have any legal right to collect from survivors should a loved one with debts pass away, that doesn’t mean they won’t try.

Certain debt collectors will attempt to make survivors feel it is their responsibility to pay off their loved ones debts. This isn’t true.

You won’t inherit your loved ones’ debts unless the debts are co-signed or joint debts, and if a deceased estate is in insolvency, it often makes sense for you as an executor to apply to court to have the estate put into bankruptcy.

Before you engage with creditors over inherited debts, make sure you seek financial advice and know your rights.

What happens if someone has more debt than assets?

If someone’s debts exceed their assets when they pass away, their estate becomes insolvent. Having an insolvent estate means that there isn’t enough money to pay off all the estate’s debts.

Debts are paid according to their priority, with some creditors having the right to payment before others. Debts will not all be paid in their entirety either and only a partial payment will be made.

For example, if the outstanding debt is $100,000 and the estate’s assets are valued at $80,000, only a percentage of the debt will be paid.

What happens with mortgage debt when someone passes away?

When it comes to inheriting debt, mortgages are the exception to the rule.

Typically the mortgage stays with the house. That means if a house is left to you as part of a person’s estate then you will inherit the house and have a legal responsibility to cover the cost of the mortgage.

However, despite inheriting the mortgage and the property you won’t technically inherit the estate’s debt.

For example, if George leaves a home worth $600,000 to his sister Anna in his will after he passes away and the property has a mortgage of $300,000 remaining, Anna can either assume ownership of the house and the mortgage would be in her name, or she can sell the home to pay off the mortgage and keep the proceeds.

The executor of a will has the power to sell or pass on an asset, such as a home, based on the current circumstances. They can work with the person who will assume responsibility for the property to decide the best course of action.

What happens to credit card debt after death?

If a person has outstanding credit card debt when they die the assets of their estate, such as a home or any savings, will be used to pay off the remaining debt.

The deceased’s state is obligated to pay off any money owed on a credit card, or any other debts, before paying beneficiaries.

However, if you have a joint credit card account with someone who has passed away you would inherit debt as the surviving co-signer. This is often a responsibility taken on by a surviving spouse or those in a long-term relationship.

If the person has no assets at the time of their death to cover the cost of any debt owed, you will not be expected to inherit their debt.

You are not obligated to pay for this credit card debt out of your own money and these should be considered to be ‘uncollectable’ debts by the credit card company. Some creditors may still try to convince you that you’re responsible for the credit card debt and threaten court action.

If this happens and you feel like you are being hassled by debt collectors for the debt of a deceased person that you don’t owe, you should consider taking legal advice.

How to avoid inherited debt

Don’t co-sign or take on joint debt

While this may be easier said than done, especially for married couples but avoiding co-signing for any personal loans or credit cards is the best way to avoid inheriting debt.

Having a joint debt means that if the other borrower stops paying, no matter what the reason, you’ll inherit the debt and be responsible for the outstanding balance. If there’s no way to avoid joint debts you should have a life insurance policy in place.

Life insurance policies can resolve the issue of unpaid debt upon the death of a borrower as it would be paid in full through the life insurance coverage.

Consider life insurance

As mentioned above, a life insurance policy can be beneficial. In general, life insurance can provide your loved ones with a financial safety net should anything happen to you.

That said, you should be wary of certain types of life insurance, like those advertised alongside certain credit cards. These kinds of policies don’t offer you comprehensive cover and are often not worth the money.

Talk to your parents, spouse or loved ones

No one likes to think about the passing of a loved one but there may come a time when you can’t avoid talking about it. Having an open conversation can make dealing with debt from your parents or another close family member a little easier when the time comes.

How to find debt help

If you’re worried about debt and passing it on to family members, it’s important to be aware of the support that is available.

No matter whether you owe medical bills, private student loans or any other kind of debt, help is available.

At A Fisher & Associates, our expert advisors will find out more about your situation and tailor our advice to your needs – helping you look forward to a debt-free future.

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