What happens to your debt when you’re gone? It’s a topic that may not often come up in casual conversations, but it’s an important one to consider, especially when planning for the future. No one wants to think about their own passing, but understanding what happens to your debt when you die can provide a sense of clarity and peace of mind. Will your loved ones inherit your financial burden? Or do your outstanding debts simply vanish?

If you’ve ever wondered about this, you’re not alone. Whether you’re managing a loved one’s estate, handling your own finances, or just curious about how the process works, knowing what happens to your debt when you die is key to ensuring everything is settled fairly.

General Rules in Canada

In Canada, debts do not disappear when you die. Instead, they become liabilities of your estate. When someone passes away, their assets and debts collectively form their estate. This is then administered according to provincial law.

The executor (also called a personal representative in Alberta) is responsible for gathering the deceased’s assets and paying off any outstanding debts before distributing the remainder to beneficiaries. In other words, your debts are paid out of your estate’s funds, not by your surviving family members.

If you are a child or spouse of someone who died, you are not personally liable for their bills unless you had a joint debt or co-signed the loan. This principle holds true across Canadian provinces. Creditors can make claims against the deceased person’s estate, but cannot demand payment from relatives who did not sign onto the debt as a co-signer or under a joint account.

That said, outstanding debt doesn’t vanish into thin air. The remaining debt stays with the estate, and estate assets must be used to pay it off before any inheritance is paid out. Provincial laws direct the executor first to settle all liabilities.

Only after all debts, taxes, and estate expenses are paid can any remaining assets be distributed to heirs. If an estate has ample assets, all valid debts should be paid in full. But what if the debts exceed the value of the estate? Only then will the outstanding debts go unpaid.

Can Children or Family Members Inherit Debt?

No, children or relatives do not inherit a deceased person’s debt in Canada, this includes credit card debt. Debt is not like an asset. It does not get passed down by virtue of being an heir.

If your parent or another family member dies with unpaid debt or taxes owed, you are not personally responsible for paying those debts from your own money unless you, yourself, legally agreed to be responsible (for example, by co-signing a loan, jointly borrowing money, or acting as a guarantor). Simply being the next of kin does not make you legally obligated for their bills or unpaid debts.

What Debts Are Forgiven at Death?

There are only a few limited exceptions where a debt might be cancelled when someone passes away. For example, provincial and federal student loans are an exception. Government student loan debt is typically forgiven upon the borrower’s death (with proof of death certificate), so neither the estate nor family members have to repay those loans from the estate’s assets.

Outside of such cases, obligations like credit cards, personal lines of credit, car loans, mortgages, and taxes remain debts of the estate. Private student loans are treated like unsecured debt when you die, so they will not be forgiven like government loans and must be added to the list of creditors’ claims.

Priority of Debt Collectors to Be Paid

All provinces follow a similar hierarchy for settling a deceased’s debts. In general and by law, certain debts are paid first in priority, and if the estate cannot cover everything, some creditors may not get fully repaid for the money owed.

Funeral, estate expenses and taxes

Reasonable funeral costs and estate administration expenses (e.g., probate fees, executor costs) alongside any taxes owed are typically paid first as a priority. The Canada Revenue Agency has a legal priority to be paid before other unsecured creditors, such as credit card companies. Executors often must obtain a clearance certificate from the CRA confirming that taxes have been paid before distributing assets. If the deceased owed income tax, the estate must pay it as a top priority, or the executor could be held personally liable for unpaid taxes.

Secured debts owed

Secured debt is a type of debt that is backed by an asset, which acts as collateral. This includes loans secured by assets, like a mortgage on a house or a car loan. These are normally settled by either transferring the asset with its debt to an inheritor or selling the asset to pay off the loan. For example, if the deceased had a mortgage, the mortgage doesn’t vanish; the house will either pass to a beneficiary who takes over the mortgage payments, or the house may be sold and the proceeds used to discharge the mortgage.

Unsecured debts

Unsecured debt is not tied to any specific asset. Credit card debt, unsecured lines of credit, personal loans, and other unsecured obligations are generally paid after taxes and secured debts. The executor uses any remaining estate funds to pay these bills. If there isn’t enough money to fully pay all unsecured creditors, they typically get paid proportionately (a partial payment) based on what funds are available. Any unpaid portion of debt is effectively written off by the creditors since no further collection can occur once the estate is exhausted.

Insolvent estate

If the estate’s debts and unpaid bills outweigh its assets, it becomes an insolvent estate, and no inheritance will go to beneficiaries at all. The remaining assets, if any, will be used to pay creditors as far as they go. Any debts beyond the estate’s capacity are essentially uncollectible since creditors cannot claim the difference from the surviving spouse or any other members of the deceased’s family.

An insolvent estate will go through a court-supervised process similar to bankruptcy, or simply distribute assets to creditors in the order required by law and then close with unpaid debts remaining.

Do I Need A Will If I Have Debt?

It’s highly recommended to have a will, even if you have debt. A will clarifies how your debts will be handled after your passing. While a will doesn’t directly cancel out your debts, it provides clear instructions on how your assets should be distributed, ensuring that your estate is managed properly.

Not all estates become insolvent. In fact, often some assets will be left over to distribute pay when a person dies with some debt. If you don’t have a will, intestate succession will determine how your assets are divided, which may not align with your wishes.

It also allows you to name an executor, someone you trust to handle your estate, including paying off debts and distributing remaining assets. If you don’t have a will, the court will appoint an administrator to manage your estate, and this may not be someone you would have chosen.

Having a will helps avoid legal complications and simplifies the probate process. In the absence of a will, there’s a risk of delays and confusion. A will can prevent potential family disputes, as it provides clarity on your wishes and how debts and assets should be divided. Without a will, family members may disagree about the distribution, especially if significant debt is involved.

While a will doesn’t erase debt, it ensures your estate is handled according to your wishes, protects your beneficiaries, and helps avoid unnecessary legal issues. If you have debt, creating a will is an important step in managing your estate after your passing. You may also want to consider taking out a life insurance policy or credit card insurance policy to help cover the costs of any outstanding debt. However, this will need to be discussed with your insurance provider.

Navigating the process can be complicated, especially in cases where the estate is complex or insolvent. If you’re unsure about how to handle an estate or deal with any debts that may come up, seeking legal advice is always a good idea. If you need assistance or have questions about managing an estate and its debts, don’t hesitate to reach out to a trusted legal professional.

At DLegal Law Office, we are committed to helping families navigate the complexities of estate planning, management, unique financial affairs, debt, and inheritance. Contact us today for sound advice and support during this difficult time. Let us help you ensure everything is handled correctly.

The content of this article is intended to provide a general guide to the subject matter and should not be considered legal or other professional advice. To get detailed information regarding your specific circumstances, please discuss your situation with a lawyer or other professional. Refer to our Legal Notice  for more details.