Everything you need to know about debt when you pass away

Debt and death: two realities that most of us dread thinking about. It’s not surprising that there are lots of misconceptions around what happens to your debt when you die, so we’re here to clear them up so you know whether you can pass it on, and who has to pay for it when you’re no longer around.

Do my relatives inherit my debt?

While your debt isn’t passed on to your relatives, it also doesn’t magically disappear. Before your executor — the person in charge of settling your estate after you pass away — can distribute assets to your beneficiaries, they must pay your debts in full and submit your final tax return. Only then can they distribute the remaining assets to beneficiaries. So while your beneficiaries won’t inherit your debt, they will receive less (or potentially nothing) from your estate if you pass away with debt.

There are two key exceptions, however, where debt can be passed on to your loved ones. The first is jointly held debt — for example if you pass away owing money on a joint credit card or a loan co-signed by a relative or spouse, they’ll be responsible for paying it off. The second exception is your mortgage, which remains attached to the house. If you pass away as the sole owner of your home and leave it in your will, the beneficiary would assume the mortgage if they elect ownership of the home. If they don’t want to take on the mortgage or other responsibilities of being a homeowner, they can work with the executor to sell the home, pay off the mortgage and keep the remaining proceeds.

What if my assets don’t cover the debt? 

Not everyone leaves behind enough assets to cover their debts. Let’s say, for example, that you were to pass away with $10,000 in credit card debt but the total value of your assets only comes to $5,000. When this happens, your estate becomes insolvent (or bankrupt) and your executor is left with two choices: to administer your estate themselves (which includes liaising with debtors, filing tax returns, and being personally liable for any errors) or to declare the estate bankrupt and hand over control of the estate to a trustee-in-bankruptcy. This removes the liability from the executor, and leaves the trustee-in-bankruptcy responsible for liaising with creditors and paying off debts.

When the debt is small, executors often choose to administer the estate. In that case, there are laws that create a priority order for paying creditors. These laws vary by province but secured debts (like a mortgage) are typically the first to be paid out. This is usually followed by reasonable and necessary funeral and burial expenses and then administrative costs incurred by the executor. Unsecured creditors are typically last in line. One benefit of the executor administering the estate is that it would give your relatives an opportunity to purchase the assets themselves.

If the debt is large, your executor may choose to place the estate in bankruptcy. Administering an estate with a large amount of debt can be complicated and time-consuming, so claiming bankruptcy relieves the executor from the responsibility and any personal liability that can arise if creditors aren’t paid properly. Declaring bankruptcy also changes the priority order for the payment of debts. Depending on the types of debts you have when you die, it could be beneficial for your executor to declare your estate bankrupt. 

What happens to my debt if I die without a will?

If you pass away without a will in place, you’ll be considered to have died intestate. There’s a common misconception that dying intestate means your assets will be handed over to the government. While you might be relieved to hear this isn’t true (unless you have no living heirs), there are other consequences to be aware of. The first is that your estate is distributed according to intestacy laws, which could mean that certain friends and family members are left out.

Second, dying intestate creates delays that can be costly, especially if you leave debt behind. This is why it’s important to make a will, even if you don’t have a large number of assets. If you pass away with a will in place, your named executor can begin the process of administering your estate right away. They can act quickly to pay off high-interest debts and close accounts and subscriptions to avoid continued payments.

Without a will, a close relative must apply to the court to be appointed as administrator (the term for an executor when there is no will). This can be a lengthy process, especially if your relatives don’t agree on who would be best suited for the role or if no one steps up. While this is happening, your debts continue to accrue interest and your accounts and subscriptions continue to run. This leaves your relatives with less to inherit and your creditors with more money. 

How do I make a plan for debts in my will?

While you can’t include a clause to erase your debts upon death (sorry!), there are steps you can take to ensure any debt is properly handled. 

First, have a conversation with your desired executor to determine whether it’s a role they’re willing to and capable of taking on. Having this conversation beforehand helps to prevent any delays for your loved ones down the road if your named executor isn’t able to fulfill the role. It’s also a good idea to name backup executors in your will. Even if your desired executor is prepared to administer your estate one day, life is unpredictable and they may not be able to do so when the time comes. 

After making your will, create a list of your assets, accounts, and subscriptions and store it with your will. This helps your executor to locate your debts and determine what needs to be closed, reducing the costs incurred by your estate. 

Like doing taxes, it’s good practice to review your will annually. If you’ve gone through any life changes like getting married or divorced, having a child, buying or selling assets, or moving, your will needs to be updated. 

Thinking about your own mortality may not exactly be anyone’s idea of fun, but making a will is easier than you might think! Whether you use an online will platform like Willful, a Canadian will kit, or visit a lawyer, the peace of mind you’ll gain knowing there’s a plan in place for your loved ones is invaluable.

We're grateful to our friends at Willful for lending their estate planning expertise to the LowestRates.ca audience. Willful makes it affordable, convenient, and easy for Canadians to create a legal will online. Willful was developed in collaboration with leading estate lawyers, with pricing plans starting at $99. It's currently available in eight provinces — B.C., Alberta, Saskatchewan, Manitoba, Nova Scotia, New Brunswick, Quebec, and Ontario. Since launching in October 2017, Willful has created more than 50,000 estate planning documents for customers across Canada.