What Happens To Your Debt When You Die In Canada

In life, two unavoidable realities persist: the inevitability of death and the ubiquity of taxes. However, for many individuals, there exists yet another inescapable certainty: the presence of debt.

Whether it be a mortgage, credit card balance, car loan, or a line of credit, debt commonly integrates itself into our financial landscape.

Queries frequently arise regarding the aftermath of one’s demise. Does your family inherit your debts automatically? Who assumes responsibility for your outstanding debts upon your passing? How do your executor and family navigate the complexities of dealing with your debts after your departure?

What Happens If You Die With Debt?

Regrettably, we must deliver unwelcome information – debts persist even after one’s demise.

Whether you’re contemplating the fate of your own debts post-mortem or find yourself as the inheritor of someone else’s debt, this comprehensive guide provides all the essential information on outstanding debts and estate planning.

Is An Executor Responsible For Debt In Canada?

When you pass away, your executor handles debt payment and estate administration.

They list your assets and debts (loans, credit cards, taxes) and settle them.

Exceptions: Joint accounts transfer to the survivor, and some debts don’t add to the estate.

If a home is passed to a beneficiary, it’s not considered part of the estate.

If debts and gifts exceed the estate’s value, abatement occurs.

Example: Jason’s $400,000 estate has $250,000 debts.

He left $200,000 to siblings, but they get $75,000 each due to debt priority. Charity receives nothing.

What Happens To Your Mortgage When You Die In Canada?

In Canada, the norm is for the mortgage to stay attached to the house after death.

For instance, Jane owns a $500,000 home and, in her will, bequeaths it to her sister Sarah.

The house carries a $200,000 mortgage. Upon Jane’s passing, Sarah can choose to take over ownership, making the mortgage hers.

Alternatively, she can opt to sell the house, use Jane’s assets to pay off the mortgage, and retain the proceeds.

The executor holds the authority to sell or transfer an asset, collaborating with the beneficiary to determine the most suitable approach.

Do I Need A Will If I Have Debt?

People say they won’t make a will to avoid burdening family with debt.

It’s a common myth; a will isn’t just for the wealthy. It guides not only asset distribution but also end-of-life preferences. In a will, you:

1. Name an executor to handle your estate – if not, the courts decide.
2. Choose a guardian for minors/pets – courts may pick someone you wouldn’t.
3. Specify funeral/burial preferences.
4. Pass on heirlooms to loved ones.

Even with a modest estate, a will acts as a family blueprint. It saves time and prevents unanswered questions about your wishes.

Can My Beneficiaries Inherit My Debt In Canada?

In Canada, beneficiaries cannot inherit your debt when you pass away.

Your will doesn’t transfer outstanding debts to them.

Your estate settles any remaining debt after your death.

Before inheritance proceeds reach your beneficiaries, assets clear debts.

What If I Have More Debts Than Assets?

Upon death, finances follow a hierarchy: funeral expenses come first, followed by estate administration costs.

After settling debts, the disbursement of designated gifts occurs.

However, if debts exceed the estate’s value, potentially leading to insolvency, the distribution of remaining assets by percentage may be affected.

Creditors with legal entitlements take precedence, although there is no assurance of full repayment.

In cases where the estate lacks sufficient funds, adjustments to gifts, referred to as “abatement,” may be necessary to address outstanding debts.

What Is Abatement In Probate?

In the event that your estate’s assets fall short of settling your debts upon your demise, a process called abatement will take place.

Before your beneficiaries receive any gifts from your will, debts must be cleared, and abatement determines the proportional payment of gifts.

If there’s insufficient funds to pay off creditors, they are prioritized. If there’s enough to pay creditors but not all gifts in full, some gifts will abate.

Typically, the residue of the estate is used to clear debts. If it’s insufficient, general gifts are considered, followed by specific gifts.

Abatement of gifts in each category occurs proportionately, preventing any single beneficiary from bearing the entire burden, though your explicitly stated intentions override abatement rules.

How Does My Executor Handle My Debts After I Pass Away?

When you create your will with Willful, we add a clause for your executor’s power. This allows them to settle debts and handle estate taxes. Your executor will:

1. List your debts, confirming amounts and due dates.
2. Close accounts to prevent accruing interest.
3. Advertise for credits (details in the next section).
4. Settle debts, including filing your final tax return.

Your executor learns about debts from bank records, credit card statements, and personal papers. Share an asset and debt list with your will for their convenience.

Read more: Everything you should know regarding inheritance law in Canada

How do creditors learn of my death and what rights do they have to pursue debt collection?

When someone dies, the executor advertises for creditors to limit their own liability.

The notice informs creditors of the death and gives them time to make claims.

The process varies by province. Traditionally advertised in newspapers, it’s now done online, often through NoticeConnect.

Executors risk liability if they don’t pay debts.

What If My Executor Doesn’t Know About A Debt That I Have?

If the executor doesn’t know about a debt, they could distribute assets to beneficiaries without paying it.

Then, the debtholder can claim against the estate, and the executor might have to pay from their own money.

For instance, if they miss a credit card debt or calculate it wrong before distributing assets, they’re responsible for those missed debts.

That’s why advertising for creditors is vital in estate administration—it reveals unknown liabilities.

Similarly, unclaimed assets, like money in bank accounts, can end up with the government if not claimed.

To prevent this, ensure your executor knows about your debts and assets. Make a list and keep it with your will to ease the process.