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  • Can I Inherit Debt After Someone's Death?

    Can I Inherit Debt After Someone's Death?

    Helen Ramlal

    Can you inherit debt? It's something many of us have wondered about at some point in our lives, whether it's driving to work or laying awake in bed late at night. Have you ever thought, “Can I inherit my parents’ debt?” Or for that matter, “Can I inherit my partner's debt, or my child’s debt?” If you’ve had this thought at 3am, you’re not alone! After all, it can be difficult enough to manage your own debt without having to take on the burden of someone else’s. Here's the 411 on inheriting debt.

    Can You Inherit Debt?

    The simple answer is no—the debts of your parents, partner, or children do not become yours if they pass away, nor will your debts be transferred to someone else should you die. However, creditors can try to make a claim on your loved one’s estate if they can prove that they are owed money. That means a person's debts must be paid out before any inheritance proceeds are paid to their beneficiaries. This applies to mortgage debt as well; it won't simply be transferred or “assigned” to the beneficiary.   

    But as with everything in life, there are of course exceptions to the rule. For example, joint and co-signed debts become your responsibility should the other co-signer pass away.

    If you have joint debts or you have co-signed on a loan for someone else, if they were to pass away, creditors will contact you for payment and will hold you responsible for paying back the debt in full. Think about it this way: if you were legally responsible for the debt while the borrower was alive, then you will remain responsible for it, especially if they were to pass away.

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    7 Tips to Avoid Inherited Debt

    Dealing with the loss of a loved one is hard enough. But having to then deal with all the paperwork and legal issues around their belongings and debt can be all too overwhelming, especially during such a difficult time. Here are some tips to help you manage the things that are within your control and avoid inheriting debt.

    Do not co-sign or take on joint debt.

    In a perfect world, you shouldn't co-sign on a loan or debt that isn't yours because you'll be held responsible in life and death for the repayment of this debt. Co-signed debt means that if the borrower stops paying for any reason (including death), you will be held completely responsible for the balance. Appropriate life insurance coverage could resolve this issue since the debt would be paid in full upon the death of the borrower.   

    Beware of supplementary credit cards.

    On occasion, we give a family member a supplementary credit card for convenience. But some companies can hold the supplementary cardholder equally responsible for repaying the entire balance. If you are a supplementary cardholder, and the primary cardholder passes away but you decide not to make payments on the account following their death, you may find negative entries on your credit report. You can certainly try to dispute it and ask the credit card company to prove their case by showing your signature on a cardholder agreement, but it could get messy. If possible, avoid having supplementary credit cards from accounts that aren't yours.

    Consider a term life insurance policy.

    If you are concerned about your loved ones inhering your debt, there are certain steps you can take now. Many people with joint debts or who have co-signed loans for a loved one take out a term life insurance policy to pay out these debts. In doing so, the debts do not “live on” for the co-signer or co-borrower.

    Talk to your parents about debt.

    Talking about death can be very uncomfortable, so instead have an open conversation about debt in general. You might find that they're just as worried as you are about passing along their debt to you. This conversation can help dispel myths and lead to an understanding of everyone’s debt situation.

    Watch out for collection agencies that prey on survivors.

    Often, debt collectors will make the survivor feel that it is their responsibility to pay off their loved one’s debt, stating it is their legal responsibility. This is simply not true. A spouse’s debt is not transferred to the other spouse upon death unless the debt was joint or co-signed. It's important to learn your rights and what collection agencies can and cannot do

    Create a will to prevent intestacy.

    It’s always a good idea to create a will of your own, so you can state exactly how you would like your estate to be distributed, ensuring that your chosen beneficiaries receive the proceeds that you want. You don’t want to fall victim to your province’s laws of intestacy (when you die without a will).

    Set-up a repayment plan to get yourself out of debt.

    If you have debt, it's important to address it as soon as possible, and learn what your options are and what would happen if you don't pay it off. There are various debt repayment options and strategies you can use to pay off your debt. If your plan does not get you debt-free within a reasonable time frame, you may want to consider getting some professional free advice from a non-profit credit counselling agency, like Credit Canada and speaking to one of our certified Credit Counsellors.

    3 important things to prevent inheriting debt.

    The loss of a loved one is a difficult time, but it’s important to remember three things:

    1. Send death certificate to creditors. If there is debt left behind and there are no assets, simply send a copy of the death certificate to each creditor so that the debt can be purged off their books.

    2. Set aside beneficiary money to pay outstanding bills. If there is a debt left behind and there are assets in the estate, the creditor can make a claim against the estate in order to recoup the money owed. Therefore, it’s best to set aside enough beneficiary money to cover these bills—at least temporarily—so that you’re not dipping into your own finances should a creditor succeed in claiming the money.

    3. Get professional legal advice. Complicated financial situations are best navigated with professional and/or legal advice to ensure that you are properly protecting yourself. Recent studies show that 77% of Canadians are planning to partially fund their retirement through inheritance money, so estate planning is well worth the time and effort!

    Worried about your own debt? Get free help!

    While it’s important to get answers to your questions about other people’s debts, it’s even more important to have control over your own. Ensure that you are on track to becoming debt-free in a set time-frame. Use our new Debt Calculator to determine which repayment plan best suits your personality and then put your plan into action. If you like, you can also contact us for a free personalized debt assessment by calling 1.800.267.2272. We will show you all the available routes that could help you be debt-free as quickly as possible. Getting debt-free is a great feeling for both yourself and your beneficiaries—that’s a true win/win for everyone!

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    Topics: Seniors

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