Death & Debt: Will My Family Have to Pay?
Death and debt are two subjects that we don’t always like to talk about, however, they are things that can weigh on peoples’ minds, especially when carrying a heavy debt load. One question that we hear from time to time is if I die, will my family have to pay my debts?
In general, your debt is yours alone and cannot be transferred to or inherited by another person upon a death.
An exception to this would be joint debts or co-signed debts. These debts are collectible from any party signed on the debt. Should you pass away with outstanding joint debts, the surviving debtor or co-signer would become responsible for whatever is left owing on the debt.
Another type of joint debt that can be of concern is from supplementary or secondary credit cards. Even though the credit card account may be in your name, some credit card companies will hold the secondary or supplementary credit cardholder not only responsible for the charges made on their card, but also for your debts as the main cardholder. It is extremely important to read the fine print and understand your rights and obligations when it comes to supplementary or secondary credit card debt. In particular, check to see if the survivor has signed the credit application form.
Unsecured debts such as utilities, credit cards, bank overdrafts, and income taxes, must be paid out of your estate before any inheritance funds can be paid to your beneficiaries.
Secured debts, such as mortgages and vehicle loans, will need to continue to be paid after you pass away in order to avoid foreclosure or repossession.
Should you pass away and there are not enough funds or assets to be sold to pay off your debts, your estate would be considered insolvent. Your estate representative would then need to seek legal advice in order to decide what to do. A Licensed Insolvency Trustee can provide information on options available.
If your estate is insolvent, it may be necessary for your estate representative to make a court application for an order authorizing them to assign your estate into bankruptcy. A Licensed Insolvency Trustee is then appointed to administer the estate by disposing of assets and distributing the funds to the creditors pursuant to The Bankruptcy and Insolvency Act.
Ways to avoid leaving financial chaos for those left behind:
1. Make a Will
Many people do not believe they need a Will because they don’t think they own anything of value. However, the benefits of drawing up a Will is a gift you can give to your family after you are gone, so they are able to deal with your affairs much more easily at an already stressful time.
When you pass away ‘intestate’ or without a Will, the province you live in will dictate how your estate will be dealt with. The added time and cost it may take to have someone appointed as a Trustee to administer your estate reduces what might otherwise be available to pay off your debts and distribute to your beneficiaries.
2. Put Your Financial Records in Order
Ensuring your estate representative or executor has all the information they need can be as simple as making a list of where to find your Will and other financial records, along with account numbers and contact information. It is important to keep this list in a safe place and let your estate representative know where to find the list in the event you pass away.
By doing this you are making life that much easier for those left behind to deal with your final affairs, in addition to dealing with your loss and as well as other life commitments they may have.
3. Emergency Savings
Having some emergency savings on hand at the time of your passing will allow your estate representative to deal with final bills that need to be paid.
While saving 4 to 6 months’ worth of expenses might seem like a lofty goal, you may never make this goal happen if you don’t start. Whether it’s the change in your pocket at the end of each day or a specific amount you have automatically transferred to your savings account on payday, try to save SOMETHING.
4. Pay Down Debts NOW
If you find yourself unable to save due to your debt load, it’s important to deal with this situation as soon as possible. This will require taking a hard look at your income and cutting back on all but necessary expenses in order to free up as much funds as possible to start paying down your debts.
Where you have already cut expenses back and still do not see the proverbial light at the end of the tunnel, this might involve looking into what options are available to you now. A Licensed Insolvency Trustee can provide the information you need for you to decide if a Consumer Proposal or Bankruptcy under The Bankruptcy and Insolvency Act might be the right choice in your particular circumstances.
5. Do Not Take on Further Joint or Co-Signed Debts
If you already have joint debt or co-signed debts, try to avoid adding more of this type of debt where possible.
6. Term Life Insurance
You may want to consider taking out a term life insurance policy in an amount sufficient to pay off joint debts, naming the joint debtor as the beneficiary. This could provide some peace of mind for a joint debtor who may not have the income to keep up with the payments on joint debts after you pass away.
Take note that if you do not name a beneficiary, the life insurance proceeds would be payable to your estate and may be subject to tax.
7. Talk About Death and Debt
Talking to your family about death and debts can be an uncomfortable conversation. However, better to be a bit uncomfortable while you’re still around, rather than having a financial mess that needs to be dealt with by your loved ones after you’re gone.
In this podcast, Derek Chase discusses dying with debt and how you can take steps as not to burden your loved ones.
If you feel that you would like to clean up your finances so as not to burden your family with having to sort through these matters, please feel free to reach out to our office for a complimentary, confidential consultation. We can walk you through the federally approved options available to extinguish your debt in a timely fashion.