Can you inherit debt? It's something many of us have thought about at some point in our lives, especially if we’re aware of a loved one’s mounting bills. So, if you’ve ever wondered, “Can I inherit my parents’ debt, my partner's debt, or my child’s debt?” 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 after death. Here's the 411 on what happens to debt when you die in Canada.
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. However, creditors can try to make a claim on your loved one’s estate if they can prove 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, 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
Most people don’t leave this Earth completely debt-free. If your loved one dies with credit card debt, the assets of their estate, such as a home or their savings, must first go toward paying off the credit cards before you, as a beneficiary, are paid out. This means the deceased’s estate is obligated to pay off credit card debts, not you or other family members (unless, as mentioned you had a joint credit card).
Of course, this also means that if the deceased has no assets, the credit card debts simply go “poof” because as they say, 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 noncollectable debts, they may try to convince you otherwise and 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.
8 Tips to Avoid Inherited Debt
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 inheriting debt.
1. 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.
2. 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.
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 out these debts. In doing so, the debts do not “live on” for the co-signer or co-borrower.
4. 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.
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. 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, 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).
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.
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 time-frame, 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 Prevent 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.
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.
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!