Managing Debt in Canada: Can You Inherit Debt, and How to Protect Your Loved Ones

^{By Taz Rajan Bromwich+Smith Staff | 1568 words | Reading Time: 7 minutes and 48 seconds | Last update: 2023/11/07}

Death is a topic that we do not talk about, and although it is an inevitable part of life, we are often shocked and in a state of unknown when we are grieving the loss of a loved one.  As much as we can, we should prepare for this stage of life to ensure we are leaving behind memories for our loved ones and not debt, and burden. Estate planning goes beyond drafting wills and inheritance; it should also address the question of whether your loved ones will inherit your debt. What happens to your debts when you die in Canada? Do your debts become an inheritance for your family?  

The Reality of Debt in Canada 

A recent poll revealed that six out of ten Canadians over the age of 60 carry at least one form of debt. It's high time we normalize discussions surrounding debt, recognizing it as a part of both life and death. If you currently find yourself burdened by debt, it's crucial to have open conversations with your loved ones. Additionally, consider exploring options like a consumer proposal while exemptions still apply. This proactive approach can help you avoid leaving your debts behind for your family to deal with after your passing. 

Understanding Debt Inheritance in Canada 

The straightforward answer to the question of whether your family inherits your debt is this: when you pass away, if your assets are insufficient to cover your debts, your family won't be responsible for paying off those debts. Instead, your assets, including your house and car, will be used to settle your liabilities (debts) before being distributed to the beneficiaries named in your will. So it is your estate that pays off your debt at the time of your death, not your family. 

Debt Relief, but Not for Co-signers 

While this may seem like a form of debt relief, there's an important caveat to consider. Just as in divorce, when both spouses have co-signed for a credit agreement, one spouse cannot simply walk away from the debt based on a divorce agreement. The same principle applies to co-signers in the event of death. If there was a co-signer on your debts, the surviving co-signer becomes fully responsible for the debt when the other person passes away. 

Preventing Loved Ones from Inheriting Your Debt 

In Canada, the legal framework is designed to prevent creditors from transferring the responsibility of your debts to your loved ones after your passing, unless they willingly agreed to be a co-signer before. However, some lenders, creditors, and collection agencies may still attempt to collect from your surviving family or estate. To protect your loved ones, consider the following: 

1. Evaluate Your Current Situation: Review your financial situation, including your assets, liabilities, and whether anyone has co-signed your debts. You can assign beneficiaries for your assets in your will to ensure your belongings go to the intended recipients. 

2. Purchase Life Insurance: If you have a significant amount of debt, and your estate is your chosen beneficiary, investing in a life insurance policy can be a wise move. This way, your dependents, such as your spouse and children, will have coverage, and a portion of the insurance payout can be used to settle outstanding debts. 

3. Create a Will: Regardless of your expectations regarding your lifespan, creating a will is a crucial step to ensure that your loved ones are treated fairly after your passing. A will allows you to specify beneficiaries for your remaining assets, and your executor does not inherit your debt upon your death. A will can be helpful if you are in medical distress prior to your passing and unable to make decisions about expenses, and end of life choices.  

4. Establish an Automatic Repayment Plan: To avoid your debts coming out of your estate, you can set up a plan through your bank that would automatically repay your debts if you were to pass away unexpectedly or become unable to manage them due to illness. Additionally, consider options like balance protection insurance for your credit cards. 

5. Seek Legal Counselling: To provide additional protection for your beneficiaries and assets, consider consulting a lawyer specializing in wills, trusts, and estates. While legal advice may come with a cost, it can be a valuable investment, as it reduces stress on your loved ones after your passing. A lawyer can educate you and your loved ones about what creditors and debt collectors are legally allowed to do if you pass away with debt. It's essential to ensure your loved ones are aware of your attorney's contact information in case creditors or debt collectors attempt to contact them. Remember that, in most cases, creditors can only withdraw money from your estate and cannot demand payment from beneficiaries or executors unless they are co-borrowers. 

While it's comforting to know that in Canada, your loved ones won't inherit your debt unless they are co-signers, it's essential to take proactive steps to protect your estate and beneficiaries. By evaluating your financial situation, considering life insurance, creating a will, setting up automatic repayment plans, seeking legal counsel, and understanding your rights, you can ensure that your loved ones are not burdened by your financial obligations. Remember, consulting with an estate lawyer is always a wise move to make well-informed decisions regarding your debt and estate. Your peace of mind and the financial security of your loved ones are worth the effort. 

Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at  1.855.884.9243, Live Chat   or you can request a call back at contact us page. We want to see you flourish!   

Related FAQ: 

1: What happens to your debts when you die in Canada? In Canada, when you pass away, your assets are used to settle your debts before being distributed to the beneficiaries named in your will. Your family won't be responsible for paying off those debts if your assets are insufficient. 
 
2: Can my family inherit my debt in Canada?  No, your family does not inherit your debt in Canada unless they willingly agreed to be a co-signer on your debts before your passing. The legal framework is designed to prevent creditors from transferring debt responsibility to your loved ones. 
 
3: What happens if I had a co-signer on my debts when I die? If you had a co-signer on your debts, the surviving co-signer becomes fully responsible for the debt when you pass away. This applies in Canada, similar to the principle in divorce agreements. 
 
4: How can I prevent my loved ones from inheriting my debt? 

To prevent your loved ones from inheriting your debt, consider these steps: 
 
Review your financial situation, including assets and liabilities. 
Purchase life insurance with your estate as the beneficiary to settle outstanding debts. 
Create a will to specify beneficiaries for your assets. 
Establish an automatic repayment plan to avoid debts coming out of your estate. 
Seek legal counsel from a lawyer specializing in wills, trusts, and estates to protect your assets and beneficiaries. 
 
5: Can creditors collect from my loved ones after my death in Canada?

In most cases, creditors can only withdraw money from your estate and cannot demand payment from beneficiaries or executors unless they are co-borrowers. Seeking legal counsel can provide additional protection for your beneficiaries and assets in such situations. 
 
6: What is a consumer proposal in Canada, and how can it help with debt?

A consumer proposal is a formal procedure under the Canadian Bankruptcy and Insolvency Act that allows you to make a legally binding offer to your creditors to repay a portion of your debts. This can be an option to explore if you have debt and want to avoid leaving it behind for your family after your passing. It's a proactive approach to debt relief. 
 
7: Can I assign beneficiaries for specific assets in my will?

Yes, you can assign beneficiaries for your assets in your will. This ensures that your belongings go to the intended recipients, and it's an essential step in protecting your loved ones from inheriting your debt in Canada. 
 
8: How does life insurance help settle outstanding debts in Canada?

Life insurance can be used to settle outstanding debts in Canada by naming your estate as the beneficiary. When you pass away, the insurance payout can cover a portion of your debts, ensuring your dependents have coverage and that your financial obligations are met. 
 
9: What is balance protection insurance for credit cards, and should I consider it?

Balance protection insurance for credit cards is an optional insurance that covers your credit card debt in the event of unexpected circumstances like death or illness. It can be a useful option to consider if you want to protect your loved ones from inheriting your credit card debt. 
 
10: Why is it essential to consult an estate lawyer regarding debt and estate in Canada?

Consulting an estate lawyer in Canada is crucial because they can provide legal advice on how to protect your beneficiaries and assets. They can educate you and your loved ones about what creditors and debt collectors are legally allowed to do if you pass away with debt, ensuring your loved ones are well-informed and protected. 

  

By Taz Rajan Community Engagement Partner at Bromwich+Smith

Taz has been in the finance industry for nearly two decades and has always been passionate about education and empowerment.  Having declared bankruptcy herself, she intimately understands the shame, stigma surrounding matters of debt as well as the joy and relief that comes from restructuring. Taz actively works to normalize the conversation of debt through blogs, media interviews, webinars, lunch & learns and through building relationships.