Who is Responsible for Settling Outstanding Debts After You Pass On?
When you die, what happens to your debts? Are they automatically forgiven?
As Canadians now hold record amounts of debt, the question of what happens to it when they pass on has become increasingly common. More and more Canadians are concerned about saddling their loved ones with their debts when they die.
Thankfully, barring certain cases, there’s little need for concern. While your debts aren’t automatically forgiven, the good news is that your loved ones also won’t automatically inherit any outstanding debts upon your death, unless they are listed as a co-signer.
It’s important to understand what happens to your debts when you pass away. Developing an effective debt management plan now can help you minimize the impact of this added stress at the end of your life.
What Debts Are Forgiven When You Die?
There’s no “automatic” process for debt forgiveness when someone dies, but some unsecured loans are more likely to be written off entirely.
This is because some debts come to be considered “uncollectable.” Some debts that are solely in the name of the deceased, or that can’t be covered by their estate, are considered uncollectable. Lenders will likely forego collection of these debts.
That’s not to say that creditors won’t follow-up with your family about outstanding debts, though. Should this occur, your family must:
- Ask for proof of their signatures on any debts. If your family members did not co-sign on any loan, then they are not responsible for paying the debt.
- Prove there are no assets in your estate to pay off your debts.
- Seek professional advice immediately.
Let’s take a closer look at some debts that creditors may forgive:
Credit Card Debt
If your credit card is solely in your name, the lender may write off this debt when you die. They are considered unsecured credit, so they do not have priority over other lenders. But if there is another name on your credit card account—i.e. you have a joint account—then your partner will be responsible for paying off this debt. They must also take your name off the account to prevent the risk of fraud after you die.
Mortgages & Car Loans
Mortgages and car loans are secured loans, so lenders will try to recover any outstanding amount owing from your estate’s assets. If your spouse or partner co-signed on these loans, they can continue making monthly payments to keep the house and car.
Yes, even once you’ve passed away, you still have to pay taxes. The Canada Revenue Agency (CRA) retrieves any tax debt after death in Canada. If your family or the executor of your will doesn’t take care of this debt first, the CRA will collect the debt from your estate.
How Are Debts Settled After Death?
After you die, it’s up to the executor of your estate to settle your debts. They serve as your legal representative after you pass on and are responsible of paying off debts using funds out of your estate. They must contact creditors and credit bureaus to notify them of your death. This prevents the risk of fraud and identity theft with your name.
Your executor should also request a credit report to find any outstanding debts. They must then determine who is responsible for these debts. If the debts have a co-signer, then the co-signer is now responsible. But if there is no co-signer, then assets from the estate must go toward settling your debts.
Bankruptcy and Death
If your estate does not have sufficient assets to pay all of your debts, including income tax debt, your executors and family members should consult with a Licensed Insolvency Trustee (LIT). The LIT is legally authorized to wind up your affairs and deal with creditors’ claims, thus removing the burden and financial risks that would otherwise fall to your executors.
Collins Barrow Brown is a Licensed Insolvency Trustee. We are very experienced in administering complex bankruptcies, including insolvent estates of deceased individuals.
Securing Your Estate
If creditors contact your loved ones, and your loved ones are not responsible for a debt, they must ask for a copy of the contract with their signature. If a creditor cannot provide this, then they cannot go after your family for your debt.
Your beneficiaries are also only responsible for paying debts if there is signed legal documentation—i.e. a co-signer. And unless they have given consent, they are not responsible for your debt.
But before they can inherit anything you leave them in your will, your creditors must be paid! So if you want to ensure your estate is secure from creditors when you die, make sure to pay off your debts so you estate doesn’t have to.
Preparing a Comprehensive Last Will and Testament
A proper will prevents your family from the costly headache of trying to figure out asset allocation.
A will dictates the allocation of your assets. Before any of your assets are distributed, they are first used to pay off your outstanding debt. Your beneficiaries will then receive the remainder of your assets.
If you don’t have enough cash assets to pay off your debt, then other assets will need to be sold to pay off debt, such as property.
It’s important to warn beneficiaries about paying creditors. If they pay a creditor, they could be unknowingly giving consent to take responsibility for a debt that isn’t theirs.
Consider Life Insurance for Lasting Peace of Mind
To protect your family financially, the best thing you can do is have a life insurance policy. This non-taxable payout will give your surviving spouse and/or family members funds to cover extra costs after you die, such as mortgage and car payments. They can also set aside the money for retirement and pay off any high-interest debts.
Lenders also offer insurance plans to cover any remaining debt in the event of death, illness, or job loss. But you may be better off opting for insurance that covers not only your debt, but all your living expenses.
These topics are the last thing you want to think about, but that doesn’t mean you shouldn’t take the time to plan and prepare. With smart debt management, a legal will, and life insurance, you can ensure your loved ones are protected and won’t have to worry about your debts after you leave.