June 6, 2024

What to do if you inherit debt

Many people worry they’ll inherit debt after a loved one passes away, but that’s not how it really works. As BDO Licensed Insolvency Trustee Francois Gilbert explains, joint debt is what people really need to worry about.

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What to do if you inherit debt

A woman holds her head in her hands

While mourning the loss of a loved one, discovering that they had significant debt, which you may be responsible for, can be incredibly overwhelming and challenging. Becoming solely responsible for a loved one’s debt after their death is rare, but it does happen.

We spoke to Francois Gilbert, a Licensed Insolvency Trustee at BDO, who explained that no one truly “inherits” debt, but you could find yourself on the hook for certain debts after the death of a loved one.

Francois Gilbert explains how debts work after a loved one has died, which debts you do and don’t need to worry about, and how you can avoid finding yourself fully responsible for paying part of your loved one’s debts.

What happens to debt when someone passes away?

Unfortunately, debt does not disappear when someone passes away. What happens to debts after death is a complex process, but we’ll look at a quick snapshot for this article.

When someone passes away, they leave an estate. Assets and debts are what make up an estate. The executor of the estate, the chosen individual or entity responsible for fulfilling the deceased's will, must sell assets to settle any outstanding debts.

“The estate has to pay off any debts before distributing money to the beneficiaries of the will,” says Francois Gilbert.

This process will typically cover most of the debts, but some may end up becoming your responsibility. You don’t need to worry about many of the most common ones, though.

What debts aren’t you responsible for?

Really, no debt can be outright inherited, Francois Gilbert points out.

“The biggest misconception people have is that when your loved ones are gone, you become responsible for paying all their debts, but that’s not how it works.”

The estate is responsible for paying the debt, he says, however “you aren’t on the hook for any debt you aren’t co-signed on.”

“You cannot inherit debt directly, but you can become solely responsible for the debt you agreed to take on with your loved one.”

There are a large variety of debts you will not have to worry about paying if you haven’t co-signed with the deceased.

These include: 

  • Credit card debt 
  • Mortgage debt
  • Car loan debt
  • Personal loans
  • Student loans

These debts aren’t your responsibility to pay because they’re individual debts. That means only one person is responsible for paying them, in this case the deceased person.

Money from the estate will go toward paying off any of these debts. What that means practically is selling assets, such as a home or car, to pay off any debts.

In this case, you will receive a smaller inheritance than perhaps anticipated, but you will not have to pay any money our of your pockets to cover the debt of a loved one who has passed away.

Worried you'll inherit debts?

Refusing a succession in Quebec

In Quebec, there is a way for you to avoid becoming responsible for a debt after a loved one passes away. The province allows you to refuse a succession. So, while you won’t be able to inherit, you also won’t be saddled with any debt if you choose to do this.

What if the estate can’t afford to pay all the debts

Sometimes the estate doesn’t have enough assets to cover the debts.

“This typically happens when the deceased lived in an apartment and didn’t own much,” says Francois Gilbert, noting that if the person who passes away owned a house, it could be sold to cover almost any debt.

Even if the estate does not have enough money to pay a debt, you still won’t be personally on the hook for anything:

“If the estate can’t cover the debts, then the executor needs to provide the creditors with a copy of a death certificate to show that the debt can’t be collected as the person has passed away. The creditors will then write off the debts.”

You won’t receive an inheritance, but neither will you have to pay any money out of your own account to settle any debts.

However, there are some debts you may become responsible for.

What debts can you become responsible for?

Most debts are either written off by creditors or handled by paying money out of the estate, as we’ve seen, but there is a kind of debt that you can become responsible for.

These are debts on which you signed a joint loan or agreed to act as the guarantor of a loan contract with the deceased.

“If you co-sign a loan with a loved one and they pass away, it makes you fully responsible for repaying that debt,” notes Francois Gilbert.

“This can be challenging for anyone who is unprepared to handle the debt payments on their own; sometimes a child has been paying 50/50 with their parent, but now it’s all on them.” 

How to avoid this situation

Before co-signing any kind of debt with a loved one, it’s important to know all the terms.

“If in doubt, you can have it looked at by a lawyer before signing. Have an honest conversation with your loved one if there is anything you feel uncomfortable about,” Francois Gilbert says.

You also need to have a conversation about your loved one’s finances before signing, he notes. This will help ensure there are no surprises or issues when it comes to your loved one paying their share of the loan.

Lastly, “talk with your loved one about what to do if they were to pass away before the loan is repaid in full; it’s best to prepare for this as best you can,” advises Francois Gilbert.

I want to pay off the loan, what should I do?

There are several options for anyone who co-signed a loan with a deceased, is now responsible for a debt, and wants to fully pay it off.

Use the estate

Francois Gilbert explains that in many cases, simply liquidating the assets of an estate can help pay off the remainder of the debt.

“If you have a joint debt with a loved one who dies, you can use their estate to pay off the remainder of the debt that has now fallen to you.

So, if there’s assets in the estate you can sell to pay off the debt, then this is your best option.”

If you do this, you won’t have to take any money out of your own account to pay the debt; you will receive a smaller inheritance instead.  

Ask family to help

Some circumstances will allow you to ask family for help paying a co-signed agreement without much fear of judgment.

If you co-signed for a mortgage on a property that was meant for family use, for instance, a cottage, you could ask other members of the family who would also use the property to help cover the payments. 

Another scenario might be that if the co-signed loan were for a shared family business venture. Involving family members in helping with loan payments can be seen as a collaborative effort to support the business's success.

Debt consolidation

If you wish to continue to pay the co-signed loan on your own but need a little bit of help, then debt consolidation is an option.

Debt consolidation will allow you to combine multiple loans into one single monthly payment, often at a lower interest rate. Having a lower interest rate could help you afford the monthly payments more easily.

I can’t afford to pay the remainder

If you know you will not be able to make the monthly payments on the debt that is now solely yours, then speaking to a Licensed Insolvency Trustee (LIT) is something you should do, says Francois Gilbert.

“LITs are professionals who can evaluate your financial situation and provide guidance on all the available options."

Knowing you can’t afford to pay the remainder of the debt means you have good financial awareness, as Francois Gilbert points out.

“The last thing you want to do with any debt is to ignore it. Knowledge is power when it comes to understanding all your debt recovery options.”

If you’re struggling with a joint debt you’re now solely responsible for due to the passing of a loved one, our Licensed Insolvency Trustees can help you become debt-free. Our team will be with you every step of the way.

Do you have more questions?

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June 6, 2024

What to do if you inherit debt

Many people worry they’ll inherit debt after a loved one passes away, but that’s not how it really works. As BDO Licensed Insolvency Trustee Francois Gilbert explains, joint debt is what people really need to worry about.

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