All information provided in this article is sourced from publicly available materials and is intended for general educational purposes only. It does not constitute legal advice. 4 Pillars is a debt advocacy firm and is not a law firm. For legal advice specific to your situation, please consult a qualified lawyer in your jurisdiction.
For many Canadians, leaving behind a financial legacy is important. Many of our previous clients have asked us about how to avoid leaving debt to their children when they pass. It’s an important consideration, because how you proceed can impact your entire family for generations.
Sources say that 67% of Canadians don’t understand what will happen to their debt once they die. That’s the vast majority of us. Unfortunately, that statistic is not surprising. The debt industry has always functioned on overly complex language, making it difficult for non-professionals to understand.
We’re here to provide clarity about complicated debt questions like what happens to debt when you die. Keep reading to find out whether your children can inherit your debt, what happens once you pass, and how to avoid it.
What Happens to Debt When You Die?
When you die, your debt doesn’t disappear. It becomes the responsibility of your estate, managed by an executor. The estate includes things like bank accounts, investments, property, and personal belongings.
The executor will need to use whatever funds you have left behind to repay outstanding debts, which may involve liquidating assets.
Before anyone receives an inheritance, the estate must be used to pay:
- Funeral costs
- Taxes owed
- Outstanding debts (credit cards, loans, lines of credit)
If there isn’t enough money to cover everything, the estate is considered insolvent, and some debts may go unpaid.
Do Children Inherit Debt in Canada?
In most cases, no. Children do not inherit their parent’s debt after they pass.
The same goes for any other living relative, including your spouse. The debt will not automatically transfer to them when you die.
However, dying while in debt can still affect your children and family members. For example, if your estate cannot pay off outstanding debts, your children’s inheritance can be reduced or eliminated completely, leaving them with nothing.
The executor must do everything possible to repay outstanding debts, even if it means using money or assets left aside for children and family members.
In some specific cases, you children may need to inherit at least a portion of your debt. We’ll cover cases where children can inherit your debt below.
When Your Children Can Inherit Your Debt
While debt usually stays with the estate, there are situations where a child could become responsible.
Joint Debts
If your child is a joint account holder on a loan or line of credit, the remaining balance becomes their responsibility. This is generally more common with spouses than children.
Co-Signed Loans
If your child co-signed a loan, they will be responsible for repaying it. That’s because, as the co-signer, the child has contractually agreed to repay it if you couldn’t. That obligation doesn’t end after death.
Secured Debts
Mortgages and car loans are tied to assets. If your child inherits the home or vehicle, they may need to keep making payments or sell the asset to clear the debt.
Informal Payments
Sometimes children continue paying a parent’s bills out of fear or pressure, even when they don’t legally have to. This can accidentally make things more complicated.
Steps You Can Take Now to Protect Your Children From Inherited Debt
Reduce the Debt While You’re Alive
Truly, the best way to protect your children from being negatively impacted by your debt is to reduce the debt while you’re still alive.
While it seems easier to leave the debt unpaid, it won’t disappear. Your family members could be left without financial support, and, in some cases, be responsible for what you didn’t pay off.
Recovering from high debts is not impossible, and there’s more options available than simple budgeting. With debt relief options like debt consolidation and consumer proposals, recovery is closer than you may think.
At 4 Pillars, we’ve helped many people in debt with large families. We understand your situation is complex, and we’re not here to judge.
We offer free, confidential consultations to help you understand your options for eliminating debt. After that, we follow up with low-cost debt education to help you rebuild your credit and change your money habits for good.
If you want to make a change that impacts your family forever, that change should start now.
Talk to one of our debt advocates about your options in Canada!
Pros and Cons of Reducing Debt While You’re Alive
Pros
- Less debt means less stress on your estate later
- You can leave more money/assets to your family
- Frees up money for savings or emergencies
- Reduces the chance your children feel pressured to step in
- Gives you professional guidance without judgment
Cons
- Requires lifestyle changes and tight budgeting
- Takes time and commitment to see results
- Some debt relief options can badly affect your credit score
Create or Update Your Will
The will determines whether your wishes are followed and how debts are handled. Oftentimes, children can be left with your debt based on how you distribute assets in the will. For example, leaving your child with the family home could make them responsible for continuing to pay the mortgage.
The best way to ensure your children aren’t left with debt is to hire a lawyer to draft/update the will.
Working with a professional helps you avoid accidentally leaving debt to your children via asset distribution. Additionally, DIY will drafting mistakes that can make your will invalid.
Review Joint Debts and Co-signed Debts
Joint debts are the biggest culprit when it comes to passing on debt after death. They are easy to forget, but your creditors will remember and chase after whoever you share the debt with once you pass.
Review any joint accounts, shared credit, and co-signed loans you have to identify what your children may be linked to.
Once you know what joint debts there are, you can take the appropriate steps to separate your finances. It’s important to start separating your finances as soon as you can, as nothing can be done to remove joint responsibility once you pass.
Talk About It
While it may seem obvious, many accidentally overlook this. If you are worried about passing on debt, tell your children about it.
Something we come across quite often in our practice is children who have started repaying their dead parent’s debts because they assumed they had an obligation.
Your children aren’t obligated to repay your debts unless they are a co-signer, share joint responsibility, or have been appointed executor of your estate (and as an executor, the debt isn’t their personal responsibility).
Having an open conversation about the debt and what you intend to do with it (pay it off via the estate) can prevent panic and misinformation later.
Have questions about debt after death?
We can help provide clarity and peace of mind. We’re happy to answer any questions and help you find solutions for your debt situation. Simply book a 1-on-1 free consultation below!
