Death is an inevitable event in life that brings about many changes, both emotionally and financially. One of the most pressing concerns that come up after someone's death is the fate of their outstanding debts. The question that often arises is, "Can one inherit an outstanding debt after someone's death in Canada?" This article aims to answer this question and other related concerns.
DISCLAIMER: This article aims to provide a general overview of the topic, and it should not be seen as legal advice. For any specific queries, seeking legal advice from a professional is always recommended.
Understanding the Concept of an 'Estate'
When a person passes away, all their possessions without designated beneficiaries or aren't subjected to specific legislation go into what is called an "Estate". The estate is the legal term used to represent the financial affairs of a deceased individual.
The management of the estate is undertaken by an executor, who is usually a lawyer or a person appointed by the deceased. The executor's role includes many responsibilities, such as making funeral arrangements, locating the will, paying estate fees, notifying creditors, settling outstanding debts, dividing the estate as per the will, and providing financial information about the estate to the beneficiaries.
It's crucial to note that an estate is a legal entity in its own right, capable of owning property and even owing debts. The primary objective of an estate is to distribute its assets as per the deceased person's will and the law.
Debt Obligation of an Estate
The estate of a deceased person must settle its debts owed. However, it is only liable to fulfill its debts with the assets it holds. Not all assets of a deceased person necessarily form part of the estate. Many assets like RRSPs, TFSAs, life insurance contracts, and jointly owned real estate usually bypass the estate and go directly to the named beneficiaries or joint owners.
This distinction is significant as it means that in certain situations, an individual's total outstanding debts before death may exceed the funds and property that form part of the estate.
Are Debts Cancelled in Canada When a Person Dies?
In Canada, when a person passes away, their debts owed are not automatically cancelled; they still survive. The responsibility for repaying the debts typically falls on the deceased person's estate. The estate includes all the assets, property, and liabilities left behind by the deceased individual. The debts are settled using the assets from the estate before distributing any remaining assets to the beneficiaries or heirs.
Inheriting Debt in Canada: A General Overview
In Canada, you generally do not inherit the outstanding debt of your parents, partner, children, etc., when they pass away. The only exceptions to this rule are if you co-signed on a debt or have a joint account with the deceased individual. Then this would be considered a joint debt, and you would be responsible for paying the balance owing.
The executor of an estate is responsible for settling any unpaid debts of the deceased individual. This does not imply that you are personally liable for paying these debts, but rather, they are required to facilitate the payment of these debts from the funds available within the estate.
It is the estate's responsibility to settle the unpaid debts, and the beneficiaries are not personally liable for these owed debts. However, it is always recommended to consult a legal expert specializing in wills and estates for specific concerns and queries.
Exceptions to the Rule
While the general rule is that debts are not inheritable, there are exceptions that one should be aware of, as follows:
Taxes of the Deceased Person
Upon a person's death, they are deemed to have disposed of all their assets, which often results in capital gains. In the event that you acquire a property with unpaid taxes, the Canada Revenue Agency (CRA) may hold you accountable for the outstanding tax amount.
Mortgages and Other Secured Debts
If a deceased individual leaves a mortgaged property to their child in their will, the beneficiary must ensure that the mortgage debt is satisfied. Failing to do so might lead to the mortgage lender possibly repossessing the property to recover the loan balance. The beneficiary can either obtain a new mortgage to pay off the old one or, in some situations, the existing mortgage company might assign the old mortgage debt to the new property owner. This principle also applies to other debts secured against an asset, like a car loan.
Can a Deceased Person File for Bankruptcy in Canada?
Yes, it is indeed possible for a deceased person's estate to file for bankruptcy if insolvent. The reasons for doing so could reduce stress for the surviving spouse, who may continue to receive phone calls (as it provides formal protection against creditors' calls to the estate). It may also change the prioritization of the remaining debts as they could be treated differently in bankruptcy. Lastly, it can simplify the complexity of the administration as it may be easier to manage creditors in the bankruptcy process.
Frequently Asked Questions
What Happens If Debt Collectors Try to Collect From Deceased Family Members?
It is best to answer their calls rather than to avoid them. Explain to them the that the person has died and they should contact the executor to see if any assets will be distributed to creditors.
The collection companies may also request a death certificate to confirm the person is deceased.
What Happens to Unpaid Debts, Such as Credit Card Debt After Death?
Credit card debt does not stop being owed simply because an individual has passed away. It is important to note that if the estate does not have sufficient funds to cover the credit card debt, the debt will not be collectible by debt collectors and will essentially remain unpaid.
Will Credit Card Company Make My Family Pay for My Debt After Death?
Credit card companies may try to make your children pay for the remaining debt if you have unpaid debt and you pass away. Therefore, it's crucial for your children to seek legal advice and understand their obligations when you pass away to ensure they avoid any unnecessary payments.
What Happens to Spousal Support Payments After Death?
In most cases, spousal support terminates upon the death of the recipient, but it may not necessarily end when the payor passes away. It is possible for spousal support payments to be made from the payor's estate if the separation agreement allows it and the estate has sufficient assets to continue the payments.
In this case, it would be best for the executor to seek legal assistance to determine its responsibilities for the estate to continue making spousal support payments.
Do Creditors Have a Right to Use My Life Insurance Policy to Pay My Debts When I Die?
Unless your life insurance policies are missing a beneficiary, making any insurance payments payable to your estate, your life insurance policy would bypass your estate entirely, and the proceeds would be paid to the beneficiary. For example, if you were to die and your beneficiary is your spouse, the insurance proceeds would go directly to your spouse and your estate.
Understanding what happens to debts after death is crucial for effective financial and estate planning. In Canada, while one does not generally inherit debt, the estate must settle its debts with its assets. It's also important to know exceptions exist, especially in joint accounts or co-signed debts. As such, it's always best to consult with a legal expert for specific situations.
Moreover, it's equally essential to have open conversations about debt and its impact on the family after death. Having such discussions and making informed decisions can minimize the burden of debt for the surviving family members.
If you are struggling with your debts, Litvack Group as a Licensed Insolvency Trustee, would be happy to have a Free Consultation to discuss your financial situation and circumstances and review your options for debt relief. Contact us today!