Surveys have shown that two-thirds of Canadians do not understand what happens to debt after death. It can be an uncomfortable subject to talk about, but it’s an essential part of financial and estate planning. Families should be familiar with what happens to your debt when you die in Canada and what you can expect if a family member has recently passed away with debt.Let’s Talk
Can You Inherit Debt?
Inheriting debt in Canada does not happen unless the debt was already jointly owned, i.e., such as a mortgage shared by two partners. The children or heirs of someone who dies with debt will not inherit it, but that does not mean that the deceased’s creditors do not get paid.
In Canada, a person’s estate must pay off that person’s debts before beneficiaries of an estate receive anything.
A person’s estate is all of the assets they leave behind. These assets include cash savings, investments, home equity, etc. A person’s creditors collect from this estate first. If there is anything left after collection, the estate is considered solvent, and the remainder can go to the estate’s beneficiaries. If the assets in the estate fall short of the total debts remaining, then those debts are erased. Family members and estate beneficiaries are not responsible for paying those remaining debts, but they will not see any payments from an insolvent estate.
Co-Signed Loans or Credit Cards
There are some exceptions to the rule that debt cannot be inherited in Canada, but not from any debts that were held by the deceased alone. Inheriting debt in Canada is possible if it’s a co-signed loan or joint credit card.
When you co-sign a loan, you are taking joint responsibility for it. In the event that the other person does not or cannot make payments on the loan, full responsibility falls to the co-signer. If you share a credit card with your spouse or help a parent qualify for a loan by co-signing, you will be responsible for the full amount owing.
Shared credit cards, mortgages, and lines of credit are among the most common reasons you would be responsible for a spouse’s debt in Canada. If you and your partner combined your debts through a debt consolidation loan, you could also wind up solely responsible for them.
However, you are not responsible for any debts that your spouse held separately. They will be settled from the estate.
How Debts Are Settled from the Estate
When someone passes away with debt, their creditors must file a claim with their estate in order to get paid. Creditors are paid in a particular order, beginning with secured creditors.
Secured credit has some kind of property attached that can be seized or sold to pay off the remaining debt. Secured creditors have priority to the extent that the loans can be recovered from the underlying asset. For example, a mortgage lender can pursue an estate up to the value of the property purchased with the mortgage. If the proceeds from the sale are insufficient to cover the entire mortgage, the lender becomes an unsecured creditor and falls behind any other priority creditors.
When you’re planning your estate and you owe debt, you may want to consider going through the insolvency process now to clear your debt. This can give you more control over how your estate is settled, and it can be worth discussing with a Licensed Insolvency Trustee if you want to ensure your beneficiaries receive something.
If you’re worried about debt using up your estate before it can go to your family, book a free consultation with David Sklar & Associates. A Licensed Insolvency Trustee will discuss your best options moving forward for dealing with your debts. They can also help you learn about any Canadian debt relief programs that could help you, such as a consumer proposal.
Credit Card Debt After Death
Credit card companies are usually the last creditors to get paid from an estate. Sometimes there are cases where the total debts exceed the assets in an estate. This means that the estate is insolvent. There will not be any assets left that go to the beneficiaries, but family members will not inherit credit card debts either.
What Debts Are Forgiven at Death?
While you cannot inherit debt in Canada, creditors still have a right to collect from the estate of the person who took out the loan. Creditors can file their claim against the estate of the deceased. Any debts remaining after all of the assets in the estate have been distributed will be forgiven.
Inheritances and Debt
Will anything be left of an inheritance after creditors have collected what they’re owed? Inheritances are rarely all cash. The vast majority of wealth in Canada is in real estate, and property often represents the most valuable asset someone has to pass on to their beneficiaries.
When someone dies with debt, their home equity and equity in any other real estate that they own individually becomes part of the estate. The mortgage lender will be the first creditor to collect against that property. However, if the mortgage has been paid off or there is still equity remaining, other creditors may collect against this amount.
If you are set to inherit property that still has a mortgage attached to it, you can assume ownership of the property as long as you also assume ownership of the debt. This can seem like inheriting debt, but the executor of the will has the power to either sell or pass along an asset. If the property is underwater (i.e., the amount owing is higher than the current market price), the property may be sold and remain in the estate, allowing the remaining mortgage debt to be forgiven without being passed on to a beneficiary of the will.
Taking on that mortgage debt oneself can be risky. If you accept responsibility for the mortgage and sell without recouping all of the debt, the only way to have the remainder forgiven would be to file bankruptcy or a consumer proposal. Bankruptcy can involve both the loss of property and having to make surplus income payments.
What Happens to RRSPs?
Registered Retirement Savings Plans may not be part of a person’s estate and could avoid collection actions from creditors. RRSPs usually have a named beneficiary, as do many pensions. When the owner of the RRSP dies, the funds in the RRSP pass outside of the estate. Creditors cannot collect from an RRSP. The CRA will still collect taxes as appropriate, but the funds cannot be used to satisfy creditors.
Spousal Support After Death
Debt and divorce in Canada are already complex, especially when assets and debts have to be split or when spousal support payments have to be made. The death of one party adds another layer of complexity to the situation.
Generally speaking, spousal support ends when the support recipient dies but does not necessarily end when the support payor dies. There are cases where spousal support payments may be made out of the payor’s estate, depending on the nature of the separation agreement, as long as the estate has assets to continue those payments.
Dealing with Debt Collectors from a Family Member’s Debt
There are cases where debt collectors attempt to pursue a family member to collect the debt. Most will file their claim with the estate first, as it is the most straightforward and legal way to collect.
If you are being contacted about a family member’s debts, the first thing you should do is ask for more details about the debt. Find out the identity of the original creditor and confirm that your family member actually owed that debt. This is also a good time to check whether you or another family member co-signed the loan. If so, the co-signer is responsible for any money owing. If not, debt collectors should not be able to pursue you for the amount owing.
Inheriting debt in Canada is not something you need to worry about, but it can affect any potential inheritance. Creditors can collect proceeds from assets in a deceased person’s estate, but if the estate is insolvent, the remaining debts do not pass on. There are cases where a beneficiary may choose to take responsibility for an outstanding mortgage if they take ownership of the attached property, but beneficiaries may not have to take ownership of the property if it does not make financial sense.
If you are in the midst of estate planning and want to deal with debts so that your beneficiaries don’t have to worry about them, you can learn more about your options with David Sklar & Associates.