Millions are already worried about debt of their own without worrying about being legally obligated to deal with another person’s debt when they die, so it’s important to know your rights and how to handle this situation if it arises.

If someone close to you, such as a parent, has recently died, you might be worried about whether you’ll start being chased for any debts they owed, such as car loans or mortgage arrears.

However, this is a common misconception and you’ll never be asked to pay debts owed by another person simply because you are their closest living relative.

In this article, we’ll delve into the topic of inherited debt so you can know what to expect if a loved one dies and they have debt.

What is inherited debt?

Inherited debt is debt you suddenly become responsible for when a loved one dies, leaving you with the burden of paying their remaining balance.

However, despite what many people think, you don’t automatically inherit debt when a spouse, parent, or child dies. Instead, the debt is passed on to the person’s estate and their assets are usually used to pay off the money owed.

The only time you’ll inherit the debt in the event of someone’s death is if you’re also listed on the credit agreement as a joint owner or guarantor.

Can you inherit debt in Canada?

In short, no. If a spouse, parent, or child passes away, you will not be held responsible for any debts they owe, nor will your debts be passed to someone else should you die.

So what happens to debt when a person dies?

Creditors can make a claim on a deceased person’s estate if they can prove they are owed money and the debt that was in that person’s name only. This means that any debts owed to creditors must be paid before any inheritance is paid to a surviving spouse, family or beneficiary.

However, any debt owed through a joint or co-signed account becomes your responsibility if the other co-signer passes away. This means that, if you have joint debts or a joint loan with someone who dies, you are now legally responsible for paying the remainder of the debt, not just 50%.

Am I responsible for parents debt?

As previously mentioned, the only way you can inherit a parent’s debt if you’re also listed on the credit agreement as a co-signer or guarantor.

This might be the case if you opened a joint credit agreement with a parent before they passed away, such as a joint credit card, property loan, car loan, investment account, or line of credit.

In this case, you become solely responsible for 100% of the debt once the other co-signer dies and you will be chased for the remaining balance.

How does a creditor know a person has passed away and what right do they have to collect debts?

While creditors don’t have any legal right to collect from survivors should a loved one with debt pass away, that doesn’t mean they won’t try.

Certain debt collectors will attempt to make survivors feel it is their responsibility to pay off their loved ones’ outstanding debts, but this isn’t true.

Remember, you won’t inherit your loved ones’ debts unless the debts are co-signed or joint debts, and if a deceased estate is in insolvency, it often makes sense for you as an executor to apply to court to have the estate put into bankruptcy.

Before you engage with creditors over inherited debts, it’s important to seek financial advice and know your rights.

What happens if someone has more debt than assets?

If an estate’s debts exceed its assets, it becomes an insolvent estate. This means that there isn’t enough money to pay off all the debt.

Debts are paid according to their priority, with some creditors having the right to payment before others. Debts will not all be paid in their entirety either and only a partial payment will be made.

For example, if the outstanding debt is $100,000 and the estate’s assets are valued at $80,000, only a percentage of the debt will be paid.

What happens with mortgage debt when someone passes away?

When it comes to inheriting debt, mortgages and other secured debts are the exception to the rule.

Typically, the mortgage stays with the house. That means that if a house is left to you as part of a parent’s estate then you will inherit the house and have a legal responsibility to cover the cost of the mortgage.

However, despite inheriting the mortgage and the property, you won’t technically inherit the estate’s debt.

For example, if someone leaves a home worth $600,000 to their sister in their will after they pass away and the property has a mortgage of $300,000 remaining, they can either assume ownership of the house and the mortgage would be in their name, or they can sell the home to pay off the mortgage and keep the proceeds.

The executor of a will also has the power to sell or pass on an asset, such as a home, based on the current circumstances. They can work with the person who will assume responsibility for the property to decide the best course of action.

What happens to credit card debt after death?

If a person has outstanding unsecured debts, such as credit card debt, when they die, the assets of their estate, such as a home or any savings, will be used to pay off the remaining debt.

The deceased’s state is obligated to pay off any money owed on a credit card, or any other debts, before paying beneficiaries.

However, if you have a joint credit card account with someone who has passed away, you would inherit debt as the surviving co-signer. This is often a responsibility taken on by a surviving spouse or those in a long-term relationship.

If the person has no remaining assets at the time of their death to cover the cost of any debt owed, you will not inherit their unpaid debts.

You are also not obligated to pay for this credit card debt out of your own money and these should be considered to be ‘uncollectable’ debts by the credit card company. Some credit card companies may still try to convince you that you’re responsible for the debt and threaten court action.

If this happens and you feel like you are being hassled by debt collectors for the debt of a deceased person that you don’t owe, you should consider taking legal advice.

How to avoid inherited debt

Don’t co-sign or take on joint debt

While this may be easier said than done, especially for married couples, avoiding co-signing for any personal loans or credit cards is the best way to avoid inheriting debt.

Having a joint debt means that if the other borrower stops paying, no matter what the reason, you’ll inherit the debt and be responsible for the outstanding balance. If there’s no way to avoid joint debts you should have a life insurance policy in place.

Life insurance policies can resolve the issue of unpaid debt upon the death of a borrower as it would be paid in full through the life insurance coverage.

Consider life insurance

As mentioned above, a life insurance policy can be beneficial. In general, life insurance can provide your loved ones with a financial safety net should anything happen to you.

That said, you should be wary of certain types of life insurance, like those advertised alongside certain credit cards. These kinds of policies don’t offer you comprehensive coverage and are often not worth the money.

Talk to your parents, spouse or loved ones

No one likes to think about the passing of a loved one but there may come a time when you can’t avoid talking about it. Having an open conversation can make dealing with debt from your parents or another close family member a little easier when the time comes.