What Happens To Your Debt When You Die

Unsure of what happens when you die to your finances?
What happens to your debt when you die
Article Overview

Have you ever wondered what happens to the debt you owe when you pass away? Who will be responsible for them? How will the creditors collect the outstanding amount? Do they just magically disappear? Find out below!

To help you understand your debt better and find your way to financial freedom and then success, check out our other helpful articles.

What Happens To Your Debt When You Die?

Debt is an undesirable obligation that most people live with. The crazy thing about debt is that it does not magically disappear when you die. Your debt obligation passes unto your estate. This means that your assets left behind will be used to service all your debts before it is then distributed to your beneficiaries.

 

What Happens To Your Finances When You Die?

Death often comes unannounced but life must go on. Your assets and finances must be sorted after you pass on. Depending on whether you have a Will or not at the time of your demise, the power to make decisions regarding your finances is bestowed on a person known as the Executor.

If you have a Will, then you must have chosen your desired executor to administer your assets and finances after your demise. Part of the executor’s responsibility is to create an inventory of all your assets and an inventory of all your debts and liabilities. The first thing is to repay all debts to your creditors before the remaining assets are distributed to your beneficiaries as you have stated in your Will.

If you passed on without a Will, someone has to apply to a court to be the administrator of your estate. An administrator has the same duty as an executor. However, such a person cannot begin to act until the court permits him/her to do so. The administrator will also make an inventory of your assets and debts/liabilities in order to settle your debts first and then distribute the remaining assets to your family members with preference to your immediate family. These may vary depending on the province you lived in. Where nobody applies to be the administrator of your estate, the court will appoint a public trustee as the executor of your estate. Essentially, your finances are handled by the executor/administrator/public trustee when you pass away, depending on the circumstances.

 

What Is Your Estate?

An estate is a juristic person that is independent of you. In other words, you and your estate are separate entities recognized by the law. It is where all your liabilities and assets are transferred after your demise. The estate is what gives continuity to your assets and liabilities, at least until when they are distributed and serviced respectively. Simply put, your estate consists of all that you have legal and equitable interests in while you were alive.

However, you need to put someone in charge of your estate. This person is known as the executor. The work of the executor is to administer your estate according to your wish after all your liabilities have been satisfied. This is important, especially when distributing your assets among the beneficiaries you have named in your Will. So do not forget to name one or two executors in your Will, depending on how big your estate is.

In the event that you pass on without leaving a Will or instructions on how your estate should be administered, it will be said that you died intestate and the government of your territory or province may set their own terms of administering your estate. In this case, priority is usually given to your immediate family members. If there are no immediate family members, the government will assume responsibility for your estate, including its income and liabilities.

 

Who Is An Executor?

An executor is an important part of your Will and its execution. He/she is the person you have appointed in your Will to review and execute the terms of your Will. The primary task of an executor is to make an inventory of your assets and liabilities and also ensure that your assets are distributed to your beneficiaries as contained in your Will. Some of the other responsibilities of an executor include:

  • Contacting the custodian of your Will – It is the responsibility of your executor to contact your legal representative or the company that you have assigned to keep your Will.
  • Appraisal of your assets – After making inventories of your assets and liabilities, it is the job of the executor to get all these assets and appraise them against your liabilities before distributing the rest to your beneficiaries.
  • Take charge of funeral arrangements – The executor will also be in charge of ensuring that there is enough fund for your funeral arrangements.
  • The executor will also open a bank account for your estate in order to centralize all your income from your assets.
  • Cancel or redirect any membership, license or recurring emails in your name.
  • Apply for probate where required.
  • Sort out all expenses in the administration of your estate in terms of debts and taxes.

 

Who Is A Beneficiary?

An important component of a Will is the beneficiaries. They are the people you leave your assets for. It is usually said that they inherit your assets. In other words, your assets become their inheritance. Your beneficiaries are legally entitled to your assets even though it may take the executor months or even years to arrange every aspect of your Will. Your beneficiaries are always entitled to know of the processes involved in your Will, even when it goes to probate. Probate is the legal court process where your Will is validated and the executor is officially chosen. During this process, beneficiaries usually have the right to challenge the terms of your Will and also object to any executor or beneficiary contained in the Will.

 

What If My Debts Outweigh My Assets?

One of the first duties of your executor is to make an inventory of your assets and liabilities. This is so that there is a clear picture of the value of your assets and your debts. There are primary things that will be taken care of before your debt profile is reviewed and repayment begins. These are things of priority and they include funeral expenses and the cost of administering your estate. After these are taken care of, your debt is the next on the list to be attended to. What happens if your debt outweighs your asset?

It is the duty of your executor to reach out to your creditors in order to settle any outstanding debt you may have left behind. The normal procedure is to take out the money to pay these debts from your estate. However, the process may be different if your debt outweighs your assets. In Canada, your estate may be subject to provincial or territorial laws that give your creditors the right to get a payment of their loan from the total value of your estate. The implication of this is that your beneficiaries may be left with nothing from your estate. Even if your assets could not cover the total debts, the liabilities will not be transferred to any of your beneficiaries except if they are named as a consignor in your Will.

When your debts are more than the value of your estate, it is akin to declaring bankruptcy when you are alive. It only means that your creditors will not be able to receive full payment. When it comes to paying the debts of an estate, it is usually done in order of priority. Some creditors have the legal right of first payment over others. Partial payments will also be paid to some other creditors. Overall, where your debts outweigh the value of your estate, the process known as abatement takes place. This is the process of using the inheritance of your beneficiaries to satisfy the debts until they are fully paid.

 

Can You Inherit Debt From Your Parents, Spouse Or Common Law Partner?

The answer to this is NO. just like when your spouse or loved one owes a debt, the creditors cannot come to you for repayment. The same thing applies when you pass on. Your debt obligation cannot be inherited by your spouse or loved ones. The whole sum will be taken out of your estate until it is fully paid. Where the debt outweighs the value of your estate, your beneficiaries will be the ones to suffer for it because they will receive no inheritance. Although one may argue that your beneficiaries are also paying the debt if they are denied of your assets because of your debts.

However, there are instances where your debt can be inherited by your spouse or loved ones. These peculiar circumstances include:

  • Joint credit card accounts
  • Consigned loans
  • Supplementary credit cards
  • Joint mortgage payments

 

How Can I Prevent My Family From Inheriting My Debt?

All provinces and territories in Canada have laws that restrict creditors from transferring the debts of a deceased to their loved ones. However, there are some creditors that may try to collect your debts from your loved ones. To prevent this, you can put any of the following in place in order to protect your loved ones:

  1. Have A Will – This will prevent the government from taking charge of your estate and distributing your assets according to the law. Having a Will puts you in control of how you want your debts to be paid. It is important to also appoint a trustworthy executor.
  2. Get A Lawyer – A lawyer that specializes in Trusts and Estates will go a long way in protecting your loved ones from the harassment of creditors.
  3. Get A Life Insurance Policy – This will cover your loved ones and a portion of the payout can be used to service any outstanding debt also.
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Written by:

Jim Pan, CFP, MFA-P

Jim is a dedicated, fee and advice only independent Certified Financial Planner with a focus on supporting healthcare business owners during their crucial growth phase. His expertise lies in offering comprehensive solutions to minimize taxes while embracing a holistic approach. With a career spanning back to 2010, Jim has established a strong presence in the financial industry. He proudly holds a range of designations, including Certified Financial Planner (CFP), and Master Financial Advisor - Philanthropy (MFA-P). He is currently pursuing additional designations and qualifications to better serve his clients and community. Beyond his qualifications, Jim is a member and an esteemed participant in the Million Dollar Round Table (MDRT), an exclusive global association comprising the top 1% of financial advisors. Jim's commitment extends to the community, where he spearheads numerous charitable fundraising events and plays an active role in enhancing the well-being of others. Additionally, he has contributed significantly by serving on the board of the Canadian Mental Health Association in Vancouver. Currently, he volunteers with Junior Achievement of British Columbia (JABC) to present personal finance topics to youths.

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