Can you inherit debt 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. Here's the 411 on what happens to your debt when you die.
Can You Inherit Debt in Canada?
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. So, what happens to debt when you die? Creditors can try to make a claim on your loved one’s estate if they can prove that 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.
For example, consider who is responsible for credit card debt after death when the card or account has two cosigners. Such 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.
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? Can you inherit debt in Canada from a spouse’s or family member’s credit card balance? Most people don’t leave this Earth completely debt free, so these are natural questions to ask.
If you have unresolved credit card debt when you die, the assets of your estate, such as a home or your savings, must first go toward paying off the credit cards before your beneficiaries are paid out.
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 is often the case with credit card debt after the death of spouses or other people with cohabitative relationships..
Of course, this also means that if the deceased has no assets, the credit card debts simply go “poof” because, as the saying goes, you can’t get blood from a stone. 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.
8 Tips to Avoid Inherited Debt
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. But then having to deal with all the paperwork and legal issues around their belongings and debt can downright be overwhelming. You also don’t want to leave your next of kin in Canada with debt when you pass on. Here are some tips to help you manage the things that are within your control and avoid giving your loved ones a debt inheritance when you pass on (or inheriting someone else’s debt when they die).
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 because you'll be held responsible for the repayment of such 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.
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 resolve this issue since the debt would be paid in full 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. 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 this could get messy. If possible, avoid having supplementary credit cards from accounts that aren't yours.
3. 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. Many people with joint debts or who have co-signed loans with a loved one take out a term life insurance policy to pay off these debts. In doing so, the debts do not “live on” for the co-signer or co-borrower.
While some might consider this morbid, it is vital for protecting you and your loved ones from excessive debt that could endanger the estate or the 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.
4. Talk to your parents 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 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 they die — but it’s important to do this at your own pace so you can have as open and frank a conversation as possible.
5. 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. 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. Knowing your rights is important, so be sure to check out our blog, What Can Debt Collection Agencies Actually Do In Canada?
6. 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 that you want. You don’t want to fall victim to 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 attorney and to create multiple copies of the will which can be left with your estate’s executor (the person who administers your will after you die) and others.
7. Give an inheritance 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 younger. Thankfully, there isn’t a Canadian inheritance tax, but there are other considerations and implications which are covered in more detail in this Globe and Mail story.
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.
8. 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 Debt Counsellors.
3 Important Things to Avoid Inheriting Debt
The loss of a loved one is a difficult time, but it’s important to remember three things:
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 that 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 debt, you may need to contact a consumer protection 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 the money.
Also, by setting aside money to pay your own debts, your loved ones don’t have to worry if they’ll inherit debt from your estate, either.
3. Get professional legal advice.
Complicated financial situations are best navigated with professional and/or legal advice to ensure 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. 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 in 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 in order to 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!
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