Do Your Debts Die With You

2014-09-22

As the baby boom generation enters retirement, more Canadians are becoming concerned about the possibility of leaving a financial burden to their spouse or children when they die. Many of us will carry (or have carried) some debt into retirement and being able to pay it all off in the time we have left can be a challenge. So what happens to our debts when we die? Do creditors just write the debts off? Do they become an obligation our family must pay? Who’s responsible and to what extent?

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As the baby boom generation enters retirement, more Canadians are becoming concerned about the possibility of leaving a financial burden to their spouse or children when they die. Many of us will carry (or have carried) some debt into retirement and being able to pay it all off in the time we have left can be a challenge. So what happens to our debts when we die? Do creditors just write the debts off? Do they become an obligation our family must pay? Who’s responsible and to what extent?

Settling Your Estate
In short, debts don’t die with you. Creditors won’t simply write your debts off upon reading your obituary. Your debts are a claim against your deceased estate that your Estate Administrator (historically called an ‘Executor’ or ‘Execu​trix’) must deal with. The Estate Administrator’s job can be complex. Where there are debts, their role will include identifying and notifying your creditors, selling estate assets and paying off your debts before distributing any remaining money to your next of kin or other beneficiaries. The Estate Administrator (who is often a family member) may be held personally liable if they fail to pay creditors ahead of beneficiaries and must keep detailed accounting records to show they acted responsibly. In the case of income tax debts, they may even need to apply to the Canada Revenue Agency for a ‘clearance certificate’ confirming that all tax liabilities have been paid before they can distribute money to the beneficiaries. If the Estate Administrator can show your creditors that there isn’t enough in the estate to pay off all the debt, your creditors may then write off the remainder of the debt, if they have no other way of collecting it.

All In The Family
Your debts can create more work and risk for your Estate Administrator and may disappoint those who expect to inherit money from you. But can your family or others be held personally liable for your debts after you die? Generally speaking, the answer is no, unless the debt is jointly held (i.e. another person also signed the contract). It’s common for spouses to hold debt jointly, although sometimes unknowingly. If you choose to add a spousal credit card to your existing credit card account and your spouse uses it, even if only occasionally, s/he may then be legally responsible to pay the full balance of the account after your death, even though most of the charges were yours. Besides co-signors, guarantors (those who sign a contract to ‘guarantee’ it will be paid) may also be held liable for debts you leave behind.

Protected Assets
While it’s true that most assets you own at the time you die come into your estate and are subject to the claims of your creditors, there are exceptions. For example, life insurance policies and Registered Retirement Savings Plans (RRSPs) where a beneficiary has been named are typically paid directly to the beneficiary; they are not part of the estate and do not need to be used to pay debts. That said, a non-spouse beneficiary of an RRSP may be liable for any taxes assessed on the plan as a result of it having been deemed to have been cashed out on the date of the person’s death.

Given the growing number of retirees, estate planning for many has become a priority.  While it’s important to focus on the basics such as updating your will (or simply getting one), it’s also important to look at ways to reduce or eliminate your debt before you die, so you leave more money and fewer headaches for your family. While people often turn to their lawyer or financial planner for estate planning advice, they should not overlook the counsel of licensed debt professionals, such as those at MNP Ltd. Sometimes, depending on the circumstances, it may make sense to reduce your debt through a legal process such as a Consumer Proposal, so the debt is manageable and can in fact be paid before you die. Resolving your debt concerns will give you peace of mind in knowing that your estate will be less complicated and perhaps you will also be able leave those you care about something in addition to memories.         ​