When her husband Marcus died of a heart attack at 39, Elena was left with more than grief.
The Oakville schoolteacher was suddenly a single mom with two small kids. She was also saddled with massive debt, including a $340,000 mortgage, a joint home-equity line of credit (HELOC) at a $50,000 balance and a shared credit card with $20,000 outstanding.
Don’t Miss
- Want to retire with an extra $1.3M? See how Dave Ramsey’s viral 7-step plan helps millions kill debt and build wealth — and how you can too
- A new nationwide survey of financial leaders warns Canada may face a recession in six months — protect your wallet with these 6 smart money moves ASAP
- Boomers are out of luck: Robert Kiyosaki warns that the ‘biggest crash in history is coming’ — here’s his strategy to get rich before things get worse
Marcus, an impulse buyer, had also accumulated $70,000 of his own consumer debt and taken out an additional $10,000 private loan that Elena had cosigned. Unfortunately, the couple didn’t have life insurance, and their emergency fund barely covered funeral expenses.
You can’t put a price on losing a loved one, but you can put a number on their unpaid debts.
And knowing which ones you may be responsible for is critical.
The truth about debt after death
Typically, a deceased person’s debt doesn’t pass to survivors, neither spouse nor children (1).
But there are exceptions.
If a debt was solely in the deceased person’s name, like Marcus’s consumer debt, it’s paid out of their estate, which is the sum of their assets, such as savings, investments and property.
If the estate doesn’t have enough to cover those debts, the surviving family isn’t usually on the hook and the debt will typically go unpaid.
In the case of federal student loans, the government student loans are discharged upon the borrower’s death.
If it’s a car loan, the car may be repossessed.
One exception where you may be on the hook is if you cosigned the loan, like Elena did with Marcus’s $10,000 personal loan, or held debt jointly, like Marcus and Elena’s HELOC and shared credit card. In these cases, you are legally responsible for the full balance.
The good news is that debts aren’t typically due right away, and there’s a specific order in which these debts are paid (2).
- Canada Revenue Agency (CRA) taxes
- Provincial or territorial taxes
- Secured debts such as a home or car
- Unsecured debts such as credit cards and lines of credit.
When someone dies, their estate has to go through probate — the legal process of validating a person’s will, settling their debts and distributing remaining assets in their estate. Creditors have three to six months to file a claim against the estate.
Read more: Here are 5 expenses that Canadians (almost) always overpay for — and very quickly regret. How many are hurting you?
How to handle debt left by a loved one?
If, like Elena, you’re suddenly responsible for big bills after a loved one’s death, you’re not alone, and you have a few options.
Negotiate: You can approach creditors and ask to settle for a reduced amount or arrange a payment plan. Creditors may prefer to accept partial payment rather than engage in a lengthy collection process or legal proceedings.
Check for student-loan discharge upon death: For federal and many provincial student loans, the borrower’s obligations terminate upon death. The executor should notify the relevant student-aid office and provide a death certificate. This relief generally means the estate is not required to continue repaying the loan. However, private student loans may not offer this protection — check the loan agreement (3).
Consolidate or restructure debt: Bringing several debts together, via a bank loan or through a debt-management program, can simplify your payments into one manageable amount. You may also negotiate for a lower interest rate to reduce overall costs.
Consider bankruptcy or a consumer proposal: If you’re stuck with debts you absolutely cannot repay (especially jointly-held loans or large unsecured obligations), insolvency under the Bankruptcy and Insolvency Act (BIA) is an option. This process is regulated by licensed insolvency trustees and gives you a legal way to deal with unmanageable debt. It should be a last resort, as it may involve giving up non-exempt assets and will affect your credit history for several years (4).
Before committing to any of these, consider meeting with a financial advisor or an estate lawyer to help protect your assets and come up with a manageable plan.
Losing a loved one is devastating enough without worrying that you’re going to have to inherit a financial mess to untangle. You can ensure your own loved ones don’t face such a situation by preparing ahead of time.
Ensure you have:
- An up-to-date will, as well as readily accessible copies of important documents and communications for your loved ones, executor or estate attorney.
- An active life insurance policy.
- Updated beneficiary information on life insurance, IRAs and retirement accounts.
- Clear documentation of debts you share jointly or under your name.
- An emergency fund that could cover three to six months of expenses — including emergency expenses like a funeral if required.
While you can’t predict the future, you can prepare for it so that you don’t leave a legacy of debt behind.
What To Read Next
- Ray Dalio just raised a red flag for Americans who ‘care’ about their money — here’s why Canadians should limit their exposure to U.S. investments
- The ultra-rich are pulling back on volatile stocks right now, warns investing legend — here are the 4 assets they’re using to help shield their millions
- I’m almost 50 and don’t have enough retirement savings. What should I do? Don’t panic. Here are 6 solid ways you can catch up
- Here are the top 7 habits of ‘quietly wealthy’ Canadians. How many do you follow?
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
BDO (1); Consolidated Credt (2); Loans Canada (3); Government of Canada (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.