Will Debt Haunt Those Left Behind When You Die?

As baby boomers continue to age, they face a growing number of questions about how they’re going to manage in the final phase of their lives. Sadly, of the nearly nine million men and women who will reach retirement age over the next 13 years, most will likely be in debt. This leaves an increasing number of Canadians wondering how they will cope with creditors on a fixed income and what happens if they die before their debts can be repaid. Some common questions include:

1. Do creditors write an individual’s debts off when they die?
2. Do an individual’s debts become the responsibility of next of kin?
3. Who is responsible for repaying those debts and to what extent?
4. What in the estate do creditors have a right to?

Though most hope to leave a legacy for their loved ones, in many cases that simply won’t be possible given their current financial state. Understanding what happens to your debts after you pass away can offer insights about what you can do to remedy your situation with the time you have left.

Your Debts Don’t Die with You

Unfortunately, creditors will not simply write off your debts upon learning of your passing. Rather, these become the responsibility of your estate manager (also known as an executor or executrix). When you die, your estate manager will be responsible for notifying all your creditors, selling off your assets and ensuring all your debts are settled. Only when this process is complete can they begin distributing any remaining money or possessions to your next of kin or other beneficiaries.

If any creditors fail to be notified, are not paid in full or fail to be paid ahead of your beneficiaries, your estate manager will be held accountable and could face penalties. Thus, it is important they keep a detailed account of the steps and actions they have taken. For their protection and peace of mind during this confusing, busy and often stressful time, it is advisable for you to:

1. Carry as little debt as possible into retirement.
2. Ensure your outstanding debts are well documented and kept as up to date as possible.

The only circumstance where your creditors may write off your debts is if the proceeds from the sale of your assets is insufficient to pay off the outstanding balance. In this case, your estate manager will be required to prove the debts cannot be paid, your creditors will accept partial payment of whatever they can get and your loved ones will not receive anything.

Your Family Members Will Not (Necessarily) be Responsible for Your Debts

Generally speaking, your family members will not be responsible to repaying any outstanding debts when you pass away. That is, unless you have any jointly held debts such as joint credit cards or guaranteed loans. In that case, the individual who co-signed will become the sole owner of that debt and will be required to pay it back. Even if your spouse only used a jointly held credit card once and the majority of the debt is yours, they will still be held accountable for the full balance.

Not Everything is Fair Game for Creditors

While most of your assets could potentially be sold off for the benefit of your creditors, there are two main exemptions:

Life insurance policies – If you have a life insurance policy where a beneficiary has been named, the benefit will be paid in full to the beneficiary and cannot be included as part of the estate. Even if the estate manager is the listed beneficiary, they cannot be compelled to use these funds to settle your debts.

Registered Retirement Savings Plans (RRSPs) – If you have an RRSP and delegated a beneficiary, the benefit will be paid in full to that beneficiary and cannot be included as part of the estate. It is important to note, however, if your beneficiary is not your spouse, they may still be responsible for paying income tax on your plan as a result of it being cashed out.

Leave a Legacy, Not a Liability

As the number of retirees continues to grow, so will the importance of estate planning for many people. While most will focus on updating their will, few will consider options for reducing or eliminating their debt before they pass away. While meeting with a lawyer and financial planner are still important steps for outlining who gets what and ensuring there will be something to bequeath — meeting with a Licensed Insolvency Trustee may offer the life-changing debt solution you and your loved ones need. By taking care of the situation now, you can be certain whatever nest egg you’ve built up will go to the people you love rather than be picked apart and sold off for the benefit of your creditors. It will make settling your estate less complicated and mean you leave more than just memories to those you care about.