What happens to your debt when you die in Canada?
Disclaimer: This article discusses Estate Planning. It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
When we think about what we leave behind for our loved ones, we often focus on assets and memories.
But what about debts?
For many, the thought of passing on financial burdens can be just as concerning as planning for the inheritance of wealth. Understanding how your debts will be handled when you’re no longer here is not just a practical matter—it’s an essential part of securing peace of mind for you and your family.
Let’s dive into how different types of debt are managed after death, so you can ensure your estate is settled with clarity and care. We will also talk about how you can build a strong estate plan that will help leave your beneficiaries with peace of mind.
What happens to your debt when you die? Will your beneficiaries inherit your debt?
In Ontario, when you die, your debts do not automatically pass on to your beneficiaries. Instead, your estate is responsible for settling any outstanding debts. Your beneficiaries will not inherit your debts personally, but the debts will be settled using the assets of your estate before any inheritance is distributed. If your estate does not have enough assets to cover your debts, creditors may not be able to claim the shortfall from your beneficiaries.
They would only be responsible for your debt obligations if they are a joint debtor or have co-signed or guaranteed the loan contract.
What happens if you die with more debt than assets?
In estate law, there is something called abatement. When an estate’s assets are insufficient to cover all debts, expenses, taxes, and the intended gifts outlined in the will, the beneficiaries will have their gifts reduced. If abatement is necessary, beneficiaries may receive less than what was originally intended in the will or, in some cases, nothing at all.
If the executor has sold the assets and those are used to pay any debt, and there is still money owing, then the estate would be insolvent or bankrupt and should be assigned to bankruptcy.
What happens to your mortgage when you die?
Secured debts, such as mortgages, are tied to specific assets. In the case of a mortgage, the lender holds a claim against the property. When you pass away, your mortgage debt must be settled, and this is typically done through the estate. The estate trustee will pay off your mortgage debt by either selling the property or transferring it to a beneficiary who will assume responsibility for the mortgage, subject to lender approval.
If there is a surviving co-borrower on the mortgage, they will continue to be responsible for paying the mortgage.
This is subject to what is in your lender agreement so be sure to look at that!
What happens to your credit card debt and other unsecured debt?
Unsecured debts, such as credit card balances, an unsecured line of credit or personal loans, are managed differently.
These debts are repaid from the assets of your estate. However, if the estate does not have sufficient assets to cover the unsecured debts, that outstanding balance may remain unpaid. Creditors generally cannot claim these unpaid debts from your beneficiaries.
Beeksma Law: Helping you leave behind peace of mind
Beeksma Law is committed to providing exceptional estate planning services that ensure your loved ones are protected from the burden of unresolved debts. Our team of experienced estate lawyers is not only skilled in navigating the complexities of debt management after death but also connected with a network of professionals, including valuation experts and insolvency and bankruptcy lawyers. This collaboration ensures that every aspect of your estate is handled with precision and care, from asset valuation to debt settlement.
At Beeksma Law, we understand that your estate plan is about more than just distributing assets—it’s about leaving behind peace of mind. With our comprehensive approach and professional connections, you can trust that your estate will be managed efficiently, preserving your legacy and safeguarding your family’s future.