February 22, 2024
What happens when someone with debt passes away? We look at a variety of common scenarios for this situation here.
The majority of major debt issues can be solved within a few years with the help of a professional.
There are who worry that they won’t be able to pay what they owe in their lifetime, though. It’s not that uncommon for someone to ask a Licensed Insolvency Trustee “what happens to my debts if I die?” They fear leaving their debts behind for their loved ones.
The answer to this question is not straightforward but knowing what will happen ahead of time can provide some peace of mind.
Unfortunately, the statute of limitations on debt does not expire upon your death.
When you pass away, you will leave an estate, which is made up of any assets and your debts. After you pass away, the executor of your estate - the person/entity appointed by the deceased individual to carry out the instructions and wishes outlined in their will after their death - will need to sell your assets to cover your debts.
As part of probate, which is the process of reviewing the assets of a deceased person and determining their inheritors, your executor may need to liquidate investments or sell other assets.
When this occurs, there may be taxes owing to the Canada Revenue Agency (CRA) that your estate will need to pay in addition to your debts.
As part of the process, your executor may also need to send a copy of your death certificate to your creditors or provide a copy of the certificate to the two credit reporting bureaus in Canada, Equifax and Transunion, to prevent anyone from stealing your identity.
If you do not have any assets, then there is nothing available to pay your debts. Your executor will provide your creditors with a copy of your death certificate to advise them that you have passed away, and the creditors will write off your debts.
However, there are certain exceptions to this.
Firstly, if you have a joint debt where both yourself and someone else have signed on for the debt, the co-borrower would still need to pay the balance owed. It is important to note that the co-borrower would need to pay the balance owed in full. An example of this would be a credit card that both you and your partner are listed on. If you were to pass, your partner would still need to pay the full balance owing, less any credit card insurance that you have on the account.
Another exception is for secured debts. This can be an amount owed for something such as a vehicle loan or a mortgage.
For example, if you owned a condo that you were paying a mortgage for but passed away, your heirs would need to maintain the mortgage payments, or the bank would start foreclosure proceedings on the condo.
However, if you pass the property with the mortgage on to an heir, they can choose to sell the property and pay off the mortgage with the money from the sale.
The good news is that your executor will always have someone that they can reach out to for help. If they are facing a situation where your debts exceed your assets, they can reach out to a Licensed Insolvency Trustee (LIT) for help. A LIT can have a free and confidential consultation with them to review your affairs, the options available, and make a plan to deal with your debts.
This plan can involve putting your estate into bankruptcy, where the assets will be sold to satisfy your debts. It can also involve having your estate file a consumer proposal, where your assets could be sold to pay back a portion of the debt owed. Both options allow your heirs to breathe easy knowing that your affairs have been handled.
Sometimes, you can pass away unexpectedly. So, what happens if you filed a bankruptcy or consumer proposal prior to passing away?
If you pass away during your bankruptcy, your bankruptcy continues as normal. If you had a life insurance policy where no beneficiary was named, the licensed insolvency trustee would need to take the proceeds of the policy to pay down your debts. At the end of the bankruptcy, an application to court will most likely be needed for your discharge, but ultimately, your debts will be discharged.
If you are in the midst of a consumer proposal at the time of passing, your executor can choose to continue the proposal payments in order to discharge your debts.
Death and debts are two topics that can cause a lot of stress. The good news is that with the help of a Licensed Insolvency Trustee, the stress your loved ones are facing can be alleviated.
This article was written by Kathryn De Vaal, a Senior Insolvency Advisor at BDO.
February 22, 2024
What happens when someone with debt passes away? We look at a variety of common scenarios for this situation here.
