March 04, 2020 | By: Helen Ramlal

Can I Inherit Debt After Someone's Death?

Seniors | Financial Literacy

Is debt inheritable in Canada? It's something many of us have wondered about at some point in our lives—especially if we’re aware of a loved one’s mounting bills. So, if you’ve ever asked about inheriting debt in Canada, 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 “debt inheritance” after death. But, can you inherit debts? If your parents die with debt, who pays it? What can you do to avoid “inheriting” debt?

Can You Inherit Debt in Canada?

Does your parents’ debt become yours when they die? What about your spouse’s, significant other’s, or child’s 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 pass.

At least, not under most circumstances because consumers can only be held accountable for debt they’ve agreed to take on.

So, if your parents die with debt, who pays for it? While they can’t come directly after you, creditors can try to make a claim on your parents’ estate if they can prove they are owed money. 

This means a person's debts must be paid out before any inheritance proceeds are paid to their beneficiaries. This rule about handling your debt when you die applies to mortgages as well; the balance won't simply be transferred or “assigned” to the beneficiary. But, as with everything in life, there are exceptions to this rule. 

Is Debt Inheritable if I’m a Co-Signer for a Joint Account or Credit Card?

If you’re a co-signer, any debts or money owed through joint and co-signed accounts 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. This is one of the few situations where the answer to the question “can debt be inherited?” is a definitive “yes.”

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What Happens to Credit Card Debt After Death in Canada?

Wondering what happens to credit card debt when you die? Who is responsible for credit card debt after death? Most people don’t pass away completely debt-free, so these are natural questions to ask. 

Like with other forms of debt, credit card debt cannot be transferred to another party unless that party was a co-signer on the account or part of a joint account.

However, what creditors can do is go after the estate of a debtor before the estate pays out any inheritance to beneficiaries.

For example, if you have unresolved credit card debt when you die, the assets of your estate, such as your home, life insurance policy, or savings, will go toward paying off your outstanding credit card balances before your beneficiaries are paid out. The remainder of the estate, if any, will then be parceled out according to your will or, in the absence of a will, any eligible parties as determined by the executor of your estate (the person who administers your will after you die).

In other words, if a loved one dies, the deceased’s estate is obligated to pay off credit card debts, not you or other family members. However, if you had a joint account, the responsibility would fall on you as the surviving co-signer. This may be the case with credit card debt after the death of spouses or other people with familial or long-term relationships.

Of course, this also means that if the deceased has no assets, the credit card debts simply go unpaid. 

Although you’re not obligated to pay these credit cards with your own money, and creditors know they are “uncollectable” debts, they may try to convince you otherwise. Creditors may even threaten to take you to court in order to recoup their losses, especially if it's a lot of money. 

If you feel you’re being harassed by collection calls for a deceased loved one’s debt that you do not owe, you can file a complaint with the appropriate consumer protection office

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9 Tips to Avoid Creating or Inheriting Debt after Death

Although the answer to the question “Can you inherit debt in Canada?” is typically “no,” there are some circumstances that can lead to a “debt inheritance” of sorts. For example, the situation where you were a co-signer on the debt the deceased person owed.

Dealing with the loss of a loved one is hard enough. Having to then deal with all the paperwork and legal issues around their belongings and debts can downright be overwhelming.

Odds are that you don’t want to leave your next of kin with debt when you pass on—or end up leaving them less than what you planned in your inheritance.

Here are some tips to help you avoid accidentally compromising your estate due to debt or taking on debt when someone else passes away.

1. Do not co-sign or take on joint debt.

In a perfect world, you wouldn't have to co-sign on a loan or debt that isn't yours. Avoiding this is important. Why? Because co-signed debt means that if the borrower stops paying for any reason (including death), you will be held completely responsible for the balance. Even if the debt wasn’t of any actual benefit to you.

If you do sign a joint debt agreement of some kind, consider taking out some life insurance to help pay off the debt in the event of the other co-signer’s death. Appropriate life insurance coverage could help resolve this issue by paying off some (or even all) of the debt upon the death of the borrower (more on this means of avoiding inheriting debt later).  

2. Beware of supplementary credit cards.

On occasion, we give a family member a supplementary credit card for their convenience. However, some companies may try to hold the supplementary cardholder equally responsible for repaying the entire balance—even though, as noted by the Government of Canada: supplemental cardholders who aren’t the primary cardholder “may not be responsible for paying back any money owing on the credit card account.”

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 despite not being responsible for the primary account. 

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 this could get messy. If possible, avoid having supplementary credit cards from accounts that aren't yours.

3. Avoid becoming a guarantor for someone else’s credit cards

If someone doesn’t have a good credit score and can’t apply for a credit card or get other financial services because of it, they may look for another person to be their guarantor so that they can get approved. However, it’s important to remember that guarantors do not have access to the credit card account but are ultimately responsible for any unpaid debts on the account.

One of the most common situations where someone would be a guarantor is a parent being a guarantor for their child’s first credit card. However, it’s typically best to avoid becoming a guarantor for anyone unless you explicitly trust them to make their payments on time.

If you do become a guarantor, try to identify ways to limit the damage that can be done with the account in question so that you don’t end up inheriting debt if they were to pass away (or even just default on the debt). For example, you could verify that the credit card account, loan, or other service has a maximum value that you could easily afford if the person you’re acting as a guarantor for defaults for any reason.

4. Consider a term life insurance policy.

If you are concerned about your loved ones inheriting your debt, there are certain steps you can take now. Those with joint debts or who have co-signed loans with a loved one can often take out a term life insurance policy to pay off these shared debts if they pass away suddenly. By doing this, they can ensure the debt is paid from the life insurance and that their loved ones aren’t saddled with a sudden financial burden, on top of losing someone they care about.

While some might consider this topic morbid, it’s vital for protecting you and your loved ones from excessive debt that could endanger the estate or inheritance. Having insurance to cover co-signed loans or to pay off leftover mortgage fees can be a massive help for ensuring the smooth transition of your estate to your loved ones.

5. Talk to your parents or loved ones about debt after death.

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

Eventually, you may want to work your way up to talking about what to do about debt after you or pass away — but it’s important to do this at your own pace so you can have as open and frank a conversation as possible.

For example, if your children are worried about whether your debt can be inherited, you can make sure they know the answer is “no.” However, it’s also important to discuss how your debt could affect your estate and their inheritance.

6. Watch out for collection agencies that contact survivors.

Often, debt collectors canl make survivors of a debtor feel that it is their responsibility to pay off their loved one’s debt. Others may even state that paying a loved one’s debts is the survivor’s legal responsibility. This is simply not true. The death of a loved one does not mean automatically inheriting debt from their estate.

A spouse’s debt is not transferred to the other spouse upon death unless the debt was joint or co-signed. Keep an eye out for any collection agencies that try to claim otherwise and be sure to report them to the authorities if they try to harass you over a deceased loved one’s debts.

Knowing your rights is important, so be sure to check out our blog, What Can Debt Collection Agencies Actually Do In Canada?

7. 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. This ensures that your chosen beneficiaries receive the proceeds you want. You don’t want to enact your province’s laws of intestacy (i.e., the rules that apply when you die without a will).

When creating a will, it’s important to have it thoroughly checked by a trustworthy legal professional and to create multiple copies of the will, which can be left with your estate’s executor/representative and others.

Some basic information the Government of Canada recommends you have in your will include the name of your “estate representative” as well as any specific funeral planning that your estate will need to pay for. Having a will is the best way to avoid leaving everything up to the provincial or territorial courts.

8. Give out to your inheritors before death

It’s becoming more and more popular to give an inheritance before death in Canada. Often, this is done simply because the giver feels they’re set for the remainder of their life and would like their children or other loved ones to be able to enjoy the money while they’re still around. Thankfully, there isn’t a Canadian inheritance tax, but there are other considerations to keep in mind.

For example, Wealth Management Canada notes that while “Canada doesn’t have an inheritance tax… the Canada Revenue Agency (CRA) will instead tax the estate instead of the beneficiary.” 

By gifting property to your inheritors while you’re still alive, you can avoid taxes owed after your death and taken from your estate—though it is possible that a capital gains tax may apply for certain gifts.  

It’s also a way for people to be able to see their loved ones reap the benefits of their inheritance while they are still alive, whether they use it to pay off debt, as a down payment on a home, or for their education. Distributing assets before your death can also help to proactively minimize the risk of squabbles over the inheritance.

9. 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 timeframe, you may want to consider getting some professional free advice from a non-profit credit counselling agency, like Credit Canada and speak to one of our certified credit counsellors.

3 Important Things to Avoid Inheriting Debt

The loss of a loved one is a difficult time. Here are a few things you can do to avoid inheriting debt or losing inheritable assets to collection agencies before you can claim them:

1. Send the 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 the debt can be purged off their books. This should get most reputable creditors off your back about any credit card debt or other money owed in short order. 

If creditors persist in saying that you have inherited the debt, you may need to contact the Office of Consumer Affairs or a provincial agency to make a complaint.

2. Set aside beneficiary money to pay outstanding bills.

If there is 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 you’re not dipping into your own finances should a creditor succeed in claiming against the estate.

To protect your own loved ones on your own passing, it’s a good idea to set up a savings account or life insurance policy to pay your outstanding debts upon the event of your death.

3. Get professional legal advice.

Complicated financial situations are best navigated with professional and/or legal advice to ensure you are properly protecting yourself. 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. Though it may be true that much of your debt may die with you, living in debt isn’t much fun either! Ensure that you are on track to becoming debt-free within a set time-frame. 

Take our Debt Assessment Quiz to find out where you stand, and then let our Debt Calculator crunch some numbers for you to determine which repayment plan best suits your personality to help put a plan into action. Our free, online Budget Planner + Expense Tracker can also help you on your path to financial freedom.

Still have questions about debt? 

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. We can help you get out of debt and back to life!

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