Does Debt Survive Death?

Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

death-debt-bankruptcy-post-updatedIf someone dies, does responsibility for payment of their debts survive their death?  Could you be held responsible for the debts of your spouse or parents after they die?

To answer this question we need to address three specific issues:

  1. Can debts be inherited?
  2. Is there money in the estate?
  3. What happens to joint debts?

We will also talk about what happens when a bankrupt person dies and whether or not a deceased individual (that is their estate) can declare bankruptcy.

Inherited Debts

It is important to know that debts cannot be inherited nor can they be transferred upon death without your agreement. In Canada, you cannot become liable for anyone else’s debt by virtue of marriage or death. The only exception to this rule is if you signed for the debt yourself, either as a joint debtor or as a guarantor.

In fact, the only way anyone becomes liable for a debt is by “signing on the dotted line”.  If you didn’t sign for it or agree to pay it, it’s not your debt.

Upon the death of an individual, the lender will still expect to receive payment. Each lender will follow different procedures.  It is not unusual for the lender to request payment from the surviving spouse or relative, even though it is not legal to attempt to collect from someone who is not the debtor.

The proper procedure is for the creditors to look to the estate of the deceased individual for payment.  If the person who died had assets, such as investments or a house, the executor or trustee of the estate is responsible for ensuring that all legitimate outstanding bills and debts are paid out of the proceeds of the estate. They should notify all creditors of the death by providing a copy of the death certificate and request that accounts, including credit cards, be closed.

While a will cannot pass responsibility for debts on to any surviving person, it does provide for the distribution of assets. These assets however cannot be distributed to any heirs until all valid debts have been paid. This may require the sale of assets in order to generate cash to pay off debts.

If there is insufficient funds in the estate to cover of the debts of a deceased individual, the remaining unpaid balance should be written off as uncollectible unless they are considered joint debts or are guaranteed by a survivor.

Joint Debts After Death

Collections for joint debts may vary by lender and by type of debt. Lenders may first look to the estate for payment or, perhaps in the case of a mortgage, allow the joint debtor to continue with the existing payment terms.

In the event there are insufficient funds in the estate to pay joint debts in full, creditors will look to the joint debtor, or co-signor to make up the balance of the loan. This unfortunately is one of the leading causes of insolvency among seniors in the event that debts are more than can now be paid on one reduced income.

You should be careful to understand what debts you are legally responsible for in the event of the death of a spouse or relative. You are only liable to pay debts you have contractually agreed to pay and have signed for. Debts cannot be inherited or left to anyone in a will.

Unfortunately after a traumatic event such as the death of a spouse the surviving spouse is often vulnerable to collection tactics, so we strongly recommend that you consult a lawyer or trustee to fully understand the rights of creditors in the event of the death of a debtor.

What Happens If A Bankrupt Dies?

If a bankrupt dies before they are discharged, the trustee will obtain a copy of the death certificate and contact the executor to determine what further actions are required.  If the deceased had life insurance, and if the beneficiary was the estate, the life insurance proceeds will be forwarded to the trustee for distribution to the creditors.  (In most cases a spouse or child is the beneficiary, in which case the life insurance proceeds are not paid to the trustee).

If the bankrupt is eligible to receive a CPP death benefit the benefit is paid to the trustee, for distribution to the creditors. However, pursuant to section 136 (1)(a) of the Bankruptcy & Insolvency Act  the trustee is required to pay reasonable funeral expenses of the bankrupt, so in many cases the death benefit is used to pay funeral expenses, and is not distributed to the creditors. 

Can A Deceased Person Declare Bankruptcy?

It is very unusual, but it is actually possible for a dead person (or more accurately the estate of a dead person) to declare bankruptcy.  For example, if the deceased has assets worth $100,000 and debts of $200,000, a bankruptcy or more likely a consumer proposal could be used to divide up the $100,000 in assets amongst the $200,000 in creditors.  In this example each creditor would get approximately half of their money, and the executor of the estate would know that all funds were distributed fairly to all creditors.

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