Estimated reading time: 13 minutes
Learn about the reality of inheriting debt and the importance of financial planning. Protect your family’s future.
Plan Today For Your Death And Debt Not Tomorrow
Some people, single or married, don’t talk about Death, Wills, Debt, and Inherited debt.
Can you inherit debt? Let’s find out.
Protecting your family from head to toe with insurance, debt freedom, and planning for your departure from earth is essential.
We need to do more planning and talking to make things easier for a widow or child looking after your financial affairs.
Related: Widow Left Broke After Spouse Passes Away
I can tell you from experience that it’s a big job that can wear you out for years.
What Happens To Debt When You Die?
For Canadians, holding debt is just a way of life, especially concerning mortgages, vehicles, loans, etc.
Not everyone is debt-free and can enjoy the luxury of not worrying about anything more than home maintenance and utility bills.
There are two answers I’m going to give you about whether you can inherit debt.
- No, you cannot inherit debt if you did not sign an agreement or your name is not associated with the debt. A debt cannot be transferred.
- Yes, you can inherit debt if you co-signed for credit with the deceased.
There is no transferring of credit when a spouse dies if you did not co-sign.
Pretty simple, but every creditor has regulations when it comes to the death of a customer.
Canadians are worried about saving for retirement, creating a Will, and increasing their credit score to live happily ever after.
Our son’s teacher has been teaching the class about fairy tales for a project.
I can hear her tell the class, “Remember friends, what a fairy tale always ends with, and they lived happily ever after.”
Doesn’t the happy, ever-after life sound good?
Unfortunately, life doesn’t always go as planned as people are dying, and there’s not much we can do about our time.
Inherited Debt And Downsizing
However, one topic that you don’t hear a lot about is whether you can inherit debt after the death of a loved one.
As mentioned above, the answer is no unless you co-signed, and this includes your children or any other family member.
Often, you might hear about parents co-signing for their child to get a loan or a new car.
If your child dies and you co-signed, then you just bought yourself a vehicle.
This could be a spouse, child, mother or father, grandparents, and step-parents.
Creditors have no shame and will try to contact anyone related to the deceased to get payment.
Typically, the debt collector will go for the estate first to get their money, but not everyone sells their estate.
I mean that a deceased person’s debt stays with the home.
Sadly, if you inherit debt and do not have cash, investments, or help to pay for inherited debt an estate sale may be your only option.
This is why we see a house up for sale after the death of a loved one.
- First, the house might be too big for one person or children living there.
- The mortgage payments are just too high to pay on one income.
- Some people don’t want to live in a house if their loved one dies in it.
Life Insurance, Pensions and Work Benefits
Before I get into this, I want you all to know that you should read the fine print before you sign anything.
Talk to a professional to see your best options, and the effect comes tax time for the deceased.
Always compare life insurance policies, as there are many life insurance advisors to choose from.
I always encourage my readers to get at least some form of term life insurance to have something.
Term life insurance is not expensive, especially if you don’t smoke or have health issues.
For years now, we’ve paid $70 a month for the two of us since we quit smoking in 2012.
Back when we were both smokers, we were paying well over $130 a month.
Due to Mrs. CBB’s disability, her life insurance policy was half what I received.
We are transferring to a different insurance policy since our investments are over 100k.
We’ve also enrolled our son and are paying his life insurance policy for 10 years at $500 each month, and he’s set for life.
It’s kind of our little gift to him that we hope he appreciates.
Also, some employees have work benefits and life insurance for the employee, but it’s your choice if you pay into it.
Unions or defined benefits plans may pay your beneficiary a year or even two years of your income if you die.
We purchased life insurance from Manulife Canada and are very happy with our advisor.
We’ve been with him for 15 years, and if we have any questions, he answers them quickly via email.
Life insurance policies can pay out big depending on what it’s worth and the situation.
It could leave enough money to pay off a mortgage, vehicle loans, and debts so the family home doesn’t need to be sold.
As for works pensions, consider if you want to release the funds, but be warned you’ll get hit with massive tax bills.
We know we went through it, but in the long term, my mother-in-law became mortgage-free.
Selling The Estate If You Inherit Debt
For those that do sell, it’s often to take the equity, pay the debt in both names and move on.
Ensure you’ve been paying for mortgage insurance, as you may find they will pay the remaining mortgage owing.
We have life insurance and skipped mortgage insurance for one reason.
Mortgage insurance pays off the remainder of the mortgage
Life Insurance gives you the money; the entire house would be covered, not just the remaining portion.
For example, if you paid $400,000 for a house and owe $200,000, mortgage insurance would give you the $200,000, whereas life insurance you’ve been paying for is for 1 million dollars, then you’ll get 1 million dollars.
See the difference?
If you live alone in your home, debts and taxes will be paid first once the estate is sold.
The executor or spouse/partner can also sell any assets to earn more cash to help pay the debt collectors.
Also, when you draw up your Will, ensure that each of you leaves the right to survivorship of the estate to each other as beneficiaries.
If this is not in your Will, you may be forced to sell everything and the assets to pay off any debts.
Inherited Debt From Credit Cards
Be wise when you sign up for a credit card because it can get costly if you don’t pay the bills.
Our friend asked us if we thought credit card insurance was worth paying for.
My answer was it depends on how much debt you plan on putting on the card.
If you’re diligent and pay your credit card off in full every month, I wouldn’t bother.
At the same time, if you have a large debt and pay minimum payments, it may be worth it.
Most interest rates are atrocious and will take years and years to pay if you don’t pay it off.
Nevertheless, if you both jointly co-signed for a loan and one of you dies, the estate is not responsible for the debt; you are.
Yet, if you apply for a credit card, there will be the owner of the card and an authorized user.
That’s how my Canadian Tire Mastercard is set up, with me as the owner of the card and Mrs. CBB as an authorized user.
Thankfully, she’s a frugal bird and won’t go hog-wild spending on stuff we don’t need.
Even so, my first credit card in Canada was set up where I was able to use my wife’s credit card but not be responsible if she were to die.
She gave me the right to use the credit card as an authorized user to spend money, and she’ll pay for it.
Remember that you need to read and understand the implications of co-signing anything.
Final Income Tax Return Of The Deceased
Lastly, there is still a final income tax return that has to be submitted to Revenue Canada of the deceased.
With so many deaths from COVID-19 and updated guidelines for preparing returns for a deceased person, there is a lot to do.
Are you the legal representative?
You are the legal representative of a deceased person if you are in one of the following situations:
- You are named as the executor in the will.
- You are appointed as the administrator of the estate by a court.
- You are the liquidator for an estate in Quebec.
- The estate designates itself.
- You are requesting to be recognized as the person who will manage the CRA tax matters for the deceased person, where there is no will or other legal documents.
Use this guide if you are the legal representative who has to file an income tax and benefit return for a deceased person. Use it with the Federal Income Tax and Benefit Guide.
They may or may not owe money for taxes; if they do, that payment will also come from the estate first.
Money In The Bank To Pay Debt
The executor of the WILL may also have access to a bank account left by the deceased.
Again, this is a bit of a process, and you will always have documents you must bring.
Just a tip: get lots of death certificates because everyone wants one.
The funeral home can help if you inform them in advance.
I believe we got about 10 of them.
Deceased Bank Account Is Frozen
They can use the cash in the deceased bank account if debts need to be paid off.
I mentioned that if you are married, you should ensure your names are on any bank accounts so they don’t get frozen.
We went through this and paid out of pocket for any debts until the bank unfroze the account.
Once that is complete, the estate executor can distribute the proceeds to the beneficiaries unless the spouse is still alive, and then they get the cash.
Downsizing Your Living Arrangements
Searching for an apartment to rent or an affordable smaller home is reasonable if you are married.
You may also have children or family that allow you to live with them for free or for a small rental fee.
When we bought our home, the homeowner had lost her husband, and she had to be in her 80s.
Her daughter sat with her during the real estate negotiations while we were outside.
She could no longer care for the home and moved to an apartment that suited her needs.
I’m sure the sale and move took a weight off her daughter’s shoulders.
This scenario is not uncommon at all, whether you are young or older.
The last thing you want to do is live paycheck to paycheck, so make wise choices.
Get Rid Of Debt As Soon A You Can
Death is a dark time for anyone close to the deceased, so dark that they may not make decisions in the right state of mind.
When Mrs. CBB’s father passed away, she told me the world was just a big blur.
The last thing she wanted to deal with was bill collectors, if there were any.
Thankfully, there were not, the house was paid in full, and there was zero credit card debt.
Technically, that’s the best scenario for anyone, so we paid our mortgage off fast.
There becomes less red tape to deal with after the fact if you or the deceased are debt-free.
This is even better if you or your spouse or partner have a Will drawn up.
This way you will have a Power of Attorney set up to deal with all the hoops to jump through.
Being a power of attorney for financial needs and health care is difficult.
I will explain more about that in another post, but beware of your commitments before you say yes.
Will You Inherit Debt For School Loans
What happens to your student loan debt if you die?
If the borrower dies, all federal student loans will be forgiven. In order to have Canada Student Loans forgiven, contact the National Student Loan Service Centre.
For the provincial or territorial part of the loan, contact the province or territory of the borrower, or the financial institutions responsible for the student loans.
Also, if you become disabled and have a student loan the government may forgive the loan.
No Money In Estate To Pay Off Debt
What happens to your debt if you die with no estate?
As always consult a professional regarding whether you will inherit debt.
If you die and there is no estate to take from whoever you owe a debt to, you will likely have to write the debt off.
Not everyone owns a house or has equity in a home to pay for debts in the deceased person’s name.
If you live alone in a house you can’t afford, selling it may be the only option, along with any contents, to pay any debts.
However, if the living partner or spouse continues to live in the house, they could talk to their banker to get an equity line of credit.
This will allow the spouse or partner to pay off any debts of the deceased that are in both of their names.
If you start to get calls from credit companies for payments of the debt, ask them for a copy of the debt receipt with both of your signatures.
If you have no signature on the debt, it’s not your debt to pay back.
Creditors are thirsty for money, so they will go after anyone, such as family members, but will likely try to get money out of the estate.
Do I Inherit Debt From Credit Cards?
A deceased credit card debt can be tricky, but only one thing can save you.
If your name is on the credit card application and your partner or spouse dies, you are responsible for the credit card debt.
Why? You signed your name on the application.
You would not have been responsible if you had not signed your name.
However, if there are assets in an estate, the credit card company can take them from there first.
If you have no estate and die, the credit card company will likely write the debt off since there is no money to take from.
Overall Thoughts – Can I Inherit Death?
From what I’ve learned through experience in Canada and educating myself on inherited debt, all I can say is to plan.
We need to prepare for many things before we leave this earth that can leave those behind with a sense of peace.
If you make their role in your death easier, then start with a Will and life Insurance and pay off debts, including all credit cards.
List all the assets, debts, credit cards, loans, investments, etc. for your Power of Attorney or living spouse.
Remember that rules can change, so don’t leave death to rest. Revise any changes year by year.
It’s weird prepping for death, but trust me, when you’re gone, everyone will appreciate the efforts.
I’ll work on a budget binder sheet to track what I mentioned above and post it on the Free Resources Page shortly.
Discussion: Have you ever been in a situation like this and would like to share your experience comment below. Thanks
I have lost two family members suddenly in 2 years.
Both were living alone, both were lost due to unexpected health conditions.
The first had a trust fund from his parents, 2 pets, and a lifetime of things. He, in seeing his health deteriorated, created a will within weeks of his death. The biggest takeaway from losing him was to reach out to family members, and let them know how you want your estate looked after. My husband and I are executors, working with his trustee, to preserve and make decisions on his estate to benefit our adult daughter with autism. That process is at a standstill due to COVID-19.
The second was my younger brother, who passed suddenly last March. No will, no discussion. His family are his adult son and wife. young daughter and his ex-spouse. Being an organizer by nature, I threw myself at it, it was very eye opening. His total credit card debt was forgiven and I spent months of detective work finding out about life insurance, pensions, bank accounts, etc and handing them all over to his wife. He hid documents in old books, small investments years even decades old. His employer was very helpful and I did as much as I could to make things more transparent for his beneficiaries.
The lesson in that one is organize your life, create a will, and document all of your accounts good and bad.
My resolution is to get our estate planning in order, including wills, documenting our accounts and debts, and our wishes. That’s the greatest gift.
It’s a tonne of work. Thanks for sharing your stories. After what we went through we went and had our lawyer draw up a Will with us and got organized.