The death of a loved one is the most stressful event human beings have to go through. It leads to an emotional crisis, characterized by shock, disbelief, denial, confusion, sadness, guilt, despair, anger, yearning, and many more. Even as you deal with these emotions, you still have to deal with such practical matters as how the debt of the departed will be handled. So, what happens to debt when you die in Canada? Let’s find out with York Credit – debt consolidation in Toronto. 

Does Debt Transfer After Death Canada?

The simple answer to “can you inherit debt in Canada?”is no. The law protects parents, partners, children, siblings, and beneficiaries of the departed from inheriting debt. As the next-of-kin or a potential beneficiary, it is not your duty to ensure that creditors are paid off even if you are named the executor of the will unless you also double up as the estate trustee. If you are not the estate trustee, you are not even obliged to notify creditors that the debtor is dead. 

Executor Liability for Debts of an Estate

According to the Estates Administration Act, R.S.O. 1990, c. E.22, there are three rules that govern the executor’s liability for the debt of an estate:

Rule 1: An executor of the will who is also named in the will does not automatically become liable for the debts of the deceased just because they are the executor. If you are the estate trustee, you do not automatically become personally liable for the debt of the deceased. Many creditors and collection agencies may attempt to pressure a next-of-kin or an executor into paying off the debt claiming they are liable, but this is false. An executor is not obligated to double up as a trustee. 

Rule 2: The estate trustee is personally liable for debts incurred by the estate trustee after the death of the deceased. An example of this is when an estate trustee hires accountants, lawyers, or movers to assist with the estate. 

Rule 3: As an exemption to Rule 1, an estate trustee can become personally liable if he/she does not handle the debt of the deceased properly. It is the responsibility of the estate trustee to ensure that the debts of the deceased are handled properly, including equitable treatment of all the creditors and distributing the estate to the beneficiaries only after confirming all creditors are paid. Note the trustee who does not act properly is not liable for all the debt of the deceased, but only to the extent of the fund they did not apply properly. 

What to Do When an Estate Has Debt

When someone dies, the estate trustee will first need to get a clear picture of the debt and assets of the deceased. Sort the debt into taxes, secured debt (like mortgages), and unsecured debts (like credit cards and insurance). After you total the debts, determine the assets of the estate and find out how they can be converted to cash. Note RRSPs and pensions are exempt from falling into the estate if there are named beneficiaries. 

What to Do If the Estate Has Assets but Is Not Liquid

If, after sorting and totalling, you find that the estate has enough assets but is short of cash at hand, this can be handled, but it requires good professional advice and a strong hand. Executors with little experience or who lack the temperament for creditor/debtor disputes can renounce the right to be estate trustees and get someone who has more experience in handling unhappy creditors. 

What to Do If the Debts of the Estate Are Greater Than the Assets

If the debts are greater than the assets of the estate, then the estate is insolvent or bankrupt. To handle a bankrupt estate:

  • You must be careful not to pay some creditors and leave out others, even when some hound you into paying. Otherwise, you will be held personally liable.
  • Do not pay non-tax creditors before paying taxes owed to the Canada Revenue Agency (CRA). You will need to file the Final Return
  • Other than the exempt assets, do not pay anything to the beneficiaries (either under intestacy legislation or by will). Exempt assets include all clothing, vehicles worth up to a maximum of $6,600, equipment, furniture, fuel, tools, and food to a maximum aggregate value of $13,150, and equity in a home up to $10,000.

Consider enlisting the services of a licensed insolvency professional (a bankruptcy trustee). They are skilled, immune from liability, and have access to the necessary legal remedies. 

What About Funeral Expenses and Burial Expenses?

It is generally acceptable to pay reasonable/modest funeral and burial expenses before paying any of the creditors. Anyone who pays for these expenses can be reimbursed from the estate, even if it is insolvent. 

Who Pays Credit Card Debt After Death in Canada?

The deceased estate is obligated to pay off credit card debt alongside other unsecured debts. However, if you had a joint credit card account with the deceased, you would inherit the debt as the co-signer. If the estate is insolvent, you are not obliged to pay off the credit card debt. Some credit cards come with credit card insurance, and you should, therefore, check to see if the deceased may have paid into such an insurance protection plan. 

Note that most Canadians who share cards do so as authorized users, not co-signers. Authorized users are not legally obliged to pay off their credit card debt. Always read through the fine print of your cardholder agreement to fully understand potential repercussions. 

What Happens with Mortgage Debt After Death?

When it comes to debt transfer after death, mortgages and car loans are an exemption because they are secured loans. If a house that has a mortgage is left to you, you will inherit the mortgage alongside the house and have a legal responsibility to pay off the mortgage. You should work with the executor to determine if it would be better to sell the home to pay off the remaining mortgage. The same applies to cars left to you that still have car loans. 

How Does Life Insurance Help?

Life insurance is a popular route for those who want to avoid leaving their loved ones in debt. A good life insurance policy pays a tax-free benefit upon death. This benefit can be used to pay off debt and tax liabilities, including capital gain and other taxes, mortgages, and credit cards. This ensures that debt does not eat into your savings and assets and usually leaves something for your loved ones to inherit. 

There are debt-specific life insurance policies and mortgage life insurance policies that also help with offsetting the debt. Mortgage life insurance policies are taken by the lender, though you pay the premiums. In the event of your death, the insurance company pays out the remaining mortgage to the lender, allowing your estate to keep the home. Although mortgage life insurance policies are convenient, they are generally less flexible and more expensive compared to stand-alone life insurance policies. Mortgage life insurance policies also do not cover the cost of capital gain tax. 

How to Handle Aggressive Creditors

The death of a loved one is tough enough – you do not need creditors to start pestering you even before you have recovered from the shock. Unfortunately, even when creditors know that the estate trustee is the one responsible for paying off creditors and even when they know some debts are not collectable (if the estate is insolvent), this does not stop some from pestering you and even threatening legal action. 

Do not panic. You can contact a consumer affairs office in your home province or territory to make a complaint if you have a creditor who is pestering you. If you are one of the estate trustees, consider renouncing your right so you do not have to deal with unhappy creditors directly.  

Tips to Save Your Loved Ones from Inherited Debt

We will all die someday. To ensure your family is not overwhelmed by debt after you are gone:

  • Avoid co-signing or taking on joint debt, and if you have to, take on some life insurance since the debt would then be paid in full upon the death of the borrower. 
  • Beware of supplementary credit cards for your loved ones since some companies can hold supplementary cardholders equally responsible.
  • There is no Canadian inheritance tax, so consider giving an inheritance to your loved ones before death.
  • Create a will to ensure your province’s laws of intestacy do not kick in.
  • Talk to your loved ones about after-death debt. This may be an uncomfortable conversation, but it helps dispel myths, helps in easy creditor identification, and eases worry. 
  • Try getting out of debt. A good certified debt counselling agency will help you keep out of debt through such methods as debt consolidation.

Nobody can pass on their debt to you after death, even when you are the spouse. Unless you have signed for the debt, it is not yours. Do not let creditors bully you. At York Credit Services, we will help you reduce your debt through debt consolidation when you are alive so you do not leave a burden on your loved ones. If you have lost a loved one and wonder if someone dies, who pays their debt? Our team is there to help you through the entire process.