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Debt after death: How debt is handled by an estate

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Staff Writer

Death is a tragic event that affects your family and friends. How well your estate is set up and whether you have debts when you die makes the impact of your loss even harder.

Thankfully, methods exist to assist your loved ones in avoiding debt before you pass away. The goal of this article is to share what happens to your debt after you pass away and strategies for mitigating the impact on your loved ones.

How are debts handled in Canada after a person’s death?

When you die, your executor is responsible for carrying out the duties of your will and arranging to pay off your debts. They will also close any accounts that you may have. These duties must be completed before assets (like money, property, or other valuables) are distributed to your heirs.

Upon death, debts are paid out in a specific order.

  1. Canada Revenue Agency tax
  2. Provincial/territory tax
  3. Secured debts such as a home or car
  4. Unsecured debts such as credit cards and lines of credit.

Upon notice of your death creditors can file a claim against your estate for the money owed. If there isn’t enough in the estate to cover the debts and you don’t have loan protection insurance, any funds available, as well as, any from the sale of assets will be used to pay off as much debt as possible following legal guidelines. Any other debt is typically written off by creditors. Heirs are not personally responsible for paying this debt unless it was held jointly or co-signed.

How the various types of debt are managed when someone dies

Credit card debt

The executor of the deceased person is responsible for paying off any credit card balance using funds from the estate. The exception is if you held a credit card jointly with the deceased. If that’s the case, you would be responsible for taking on the payments.

Mortgage

When a person dies, the responsibility of the mortgage transfers to their spouse or a person whom they put in their will to own their home. If the beneficiary can’t pay the mortgage and there are no other funds, such as insurance, to cover the costs they have the option of selling the home.

If the deceased didn’t write a will, the executor will arrange for the estate to pay the mortgage until the home is sold. That’s one reason why creating a will before passing is essential.

Student loans

If a person dies with federal and provincial student loan debt, the National Student Loans Service Centre can forgive the debt. No one will have to pay it off. The deceased person’s estate will not be pursued for the money, and their loved ones will not inherit the debt. To prove their passing, documentation showing the former student’s death will be required.

Even though federal and provincial student loan debt will be forgiven, private student loan debt might not be. Private student loan lenders retain the option to either forgive a deceased person’s debt or pursue repayment from their estate.

Car loan

Similar to a mortgage, when someone passes away if the deceased person has bequeathed the car to someone they will take on the responsibility. of making car loan payments. If the car hasn’t been bequeathed, the executor will use funds from the deceased person’s estate to continue making payments until the car is sold.

Mitigating debt burden before you die

If you don’t want to burden your loved ones with having to deal with your debt, there are steps you can take.

Step 1: Debt repayment plan

Managing your debts before you die involves creating a comprehensive list of all debts, prioritizing them based on interest rates and balances, and setting up a clear payment plan. If you have a lot of debt, consider working with a financial professional to implement one of the debt relief programs described below.

Step 2: Purchase life insurance

A life insurance policy will ensure that your loved ones will get some money to mitigate financial strain. The money can be used to clear any debts and cover family needs like food costs, student loans, emergency savings, or moving to a new home.

Step 3: Get loan protection

Loan protection is useful for unsecured credit, like credit card debt or loans. If you have a significant amount of unsecured debt, getting loan protection insurance can assist in paying off the remaining balances if you were to pass away. Some loan protections cover other life-impacting situations like job loss and a critical illness diagnosis as well.

Step 4: Get a will

Ease the burden of your loved ones by writing up a comprehensive will that outlines your

  • Financial information
  • Executor
  • Beneficiaries
  • Guardian of your children or pet(s)
  • Final wishes

Debt relief program options

Should you have a significant amount of debt and want to manage it efficiently to minimize the chances of it being a burden to your loved ones, there are certain debt relief programs available. Below are short descriptions of some of these programs that may work for you.

Debt Management Program

Debt Management Programs (DMP) make paying down debts easier by reducing your payment amount and amount of payments. The biggest benefit DMPs offer is lowering or even eliminating, interest rates and certain fees. They also combine several debts into one monthly payment. A credit counsellor then distributes this payment among your creditors.

These programs usually take about three to five years to complete and, on average reduce the amount of debt paid back by 30 – 50%. Credit counsellors can also advise on financial knowledge such as creating a budget and setting up an emergency fund.

Consumer Proposal

A consumer proposal (CP) is an agreement made with the help of a Licensed Insolvency Trustee to cut down on your debt obligations significantly. Often, by 70 to 80%. Consumer proposal regulations limit agreements to five years. CP agreements set monthly payments based on your income and household expenses.

After creditors accept the terms of the proposal and a court approves it, it becomes a legally binding process. This means creditors can’t take any legal or collection actions against you as long as you stick to the proposal’s terms.

Although consumer proposals are extremely helpful, they can reduce your credit score. However, once you are finished paying off the proposal you can start building your credit score back up.

Debt Settlement Program

The key to a debt settlement program is the drastic reduction of the principal balance obligation. Debt settlement organizations run these programs. Settlement experts negotiate with your creditors to reduce your debt. Sometimes by as much as 20% to 80%, to an amount that fits within your budget.

Although debt settlement programs are great debt relief solutions, they can hurt your credit score. As a general rule, the more money you pay back to your creditors the less damage to your credit score.

Key Takeaways

  • The government will forgive federal and provincial student loans upon your death.
  • If you have more debts than assets, your creditors may not get the full amount of debt that you owe them.
  • Create a will to lessen financial stress on your loved ones, inform others of your final wishes and appoint who will care for your minor children.
  • When you pass away, your estate, which includes all your assets and belongings, will handle your unpaid debt.

FAQ

Why can’t I just create an extreme amount of credit card debt knowing that I am going to die soon?

Creating extreme credit card debt with the knowledge of impending death is unethical. It intentionally leaves behind financial burdens for your loved ones to deal with. Creditors may seek repayment from any assets you leave behind or even harass your loved ones for payment. Even when loved ones are not obligated to pay them. This is not a great legacy to leave behind.

Does a deceased person’s debt impact inheritance?

Before any of their loved ones get a portion of their inheritance, a deceased person’s estate will have to pay off their debts. If their debts are higher than the inheritance they wish to give to their family and friends they won’t receive the full portion of their inheritance. 

What is the consequence of having more debt than assets?

If your debts exceed your assets when you pass away, your creditors may not be able to collect payment. This means your debts cannot be fully paid off. As a result, your creditors will only receive a partial amount of money you owe them unless you have joined an account with someone or cosigned on a loan with a loved one.

Is it necessary to have a will if I have a massive amount of debt?

Having a large amount of debt doesn’t change the fact that having a will is important. Other than finances, there are many other vital components of a will. It’s where you will declare the beneficiaries of your assets and the executor upon your death. It’s also where you state who will be the guardians of your minor children. A will even lets you specify your funeral and burial wishes.

Is there a way for creditors to know that I’ve passed away?

When you die, your executor must inform any organization you owe money to that you have passed away. They usually do this by making a phone call or using websites like NoticeConnect and Estate-a-base, which help executors publish death notices to creditors.

Final Thoughts on what happens to your debt after death

You can do many things to manage your debts while you are alive. These activities will ensure that when you pass away, you can leave your loved ones with financial peace of mind instead of debt. Consider speaking to a credit counsellor to help you figure out how to manage your budget, stay out of debt, and deal with unsecured loans. They can help you improve your financial health to relieve debt stress for you now and your loved ones should you pass away.

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