Not many Canadians manage to go through life without debt. Whether it’s consumer debt, a student loan, your six-figure mortgage, or unpaid taxes — debt can be a worrisome problem, especially after you pass away.
Sometimes these debts accumulate over time, and sometimes they don’t. Still, regardless of how significant the debt is, you can’t help but wonder about what will happen to that financial liability after the indebted person dies.
If you’re the one with debts, you don’t want to transfer the obligations to your close ones, and if you’re the inheritor, you don’t want to end up paying someone else’s debts while having your financial security to manage. So, what happens to your debt after you pass away? It surely doesn’t vanish into thin air – and if it doesn’t, then who pays it? Let’s find out.
Additional Reading for Smart Estate Planning
- Who needs a will? And why?
- 3 moments when you should review your estate plan
- Is creating a will online safe?
- What happens to your assets after you die?
- Who is responsible for your debt after you pass away?
- How much does it cost to die?
- Do families fight over estates?
- Are you planning a death dinner (to discuss your wishes after you're gone)?
- Can you protect your digital assets?
- Life insurance and estate planning in the age of COVID-19
- International property and the problem with multiple taxes after death
Does debt disappear after you pass away?
First, the fundamental question that everyone asks: does the debt go away once the person dies? Unfortunately, it does not. Debt is money owed to creditors and companies who require repayment for their services or products — which means they can’t just forget about unpaid bills.
If the debt doesn’t go away, then who pays for it when the indebted person dies? This is a question that requires a bit of explaining. It’s mainly because the debt does get transferred to the inheritor, but only under certain conditions.
#1: Consumer debts
The chances of falling into debt as a result of another person’s financial debts received through inheritance are very slim. You have no obligation to pay their bills, nor to cover their debt after death unless you’re a cosigner of a loan or share some property at the time when the person dies. Even then, if the property you receive is big enough to cover all debts, you’re off the hook and don’t have to pay about anything.
#2: Their mortgage
If you’re living with a person who has a mortgage on the house, make sure that you know the details of the mortgage. Questions like: how much debt remains owing and is there any additional debts, such as a second mortgage or secured line of credit? It’s essential to be aware of their financial situation beforehand. You don’t want to be left investing a lot of your funds in the property without any return.
With that in mind, the mortgage in Canada stays with the property, not the person whose name is on the mortgage. Therefore, if you have a mortgage at the time of your death, whoever receives the house, will also receive the mortgage.
Questions to ask yourself about your current financial situation
Some questions require special consideration when discussing and settling debt post-mortem:
- Are the beneficiaries part of a blended family?
- What happens if the indebted person moves into assisted living?
- Are there any gifts placed in trust?
- Does the person have a life insurance policy?
The answers to these questions may change the way debt is dealt with and, as such, should be well thought out and addressed before splitting the property. If the person who passed away has named an executor for their estate, that person will have the obligation of making sure they settle all debts before distributing the estate to the beneficiaries.
Every death is unpleasant, but having debts to settle after a person’s death can cause additional anxiety and stress for the inheritors. One thing you can do to alleviate this stress is to keep your debts organized. This way, if the worst thing happens unexpectedly, it will be easier for your inheritors to settle the obligation and proceed with the division of the estate.