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What Happens to Your Debt When You Die?

You may wonder whether your loved ones will be responsible for paying off your debt when you die. Dealing with the passing of a loved one is a deeply emotional and challenging time. Amidst the grieving process, questions related to the debts of the deceased will inevitably arise. Here’s what you need to know about handling debt when someone passes away.

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Debt Obligations Upon Death

When an individual passes away in Canada, their debts don't simply disappear. In most cases, their outstanding debts become part of their estate's obligations. Any assets they leave behind, such as property, investments or savings, may be used to settle these debts before the remaining assets are distributed to beneficiaries or heirs.

The Executor's Role

The person designated as the executor of the deceased's will is responsible for managing the deceased's affairs, including their debts. The executor's role involves identifying, valuing and settling the debts using the assets within the estate.

Secured vs. Unsecured Debts

Secured debts are tied to specific assets, such as a mortgage or a car loan, where the asset serves as collateral. In the event of the borrower's death, the lender may have a claim on the asset itself. Unsecured debts like credit card balances and personal loans don’t have collateral attached. These debts are typically paid from the estate's assets if funds are available.

Joint Debts

If the deceased had joint debts with a spouse, co-signer or another individual, the responsibility for those debts often falls on the surviving joint account holder. They become solely responsible for the outstanding balance, as the debt is considered a shared obligation.

Debts Exceeding Estate Value

If the deceased's debts exceed the total value of their estate, the estate may be declared insolvent, and the assets will pay off the debts in order of priority as determined by provincial laws. In this scenario, beneficiaries may not receive any inheritance.

Life Insurance and Debt

If the deceased had a life insurance policy with a designated beneficiary, the proceeds typically don’t become part of the estate. The Insurance proceeds do not form part of the deceased estate property and are for the benefit of the beneficiary.

Creditors' Claims

Creditors have the right to file claims against the deceased's estate. The executor needs to notify creditors and provide them with the necessary documentation, such as a death certificate and details of the estate. Creditors are typically given a specific period to file their claims.

Personal Debt Management Services in Ottawa and Across Ontario

If you worry about how your debts will affect your loved ones after you pass, contact a licensed insolvency trustee at D. & A. MacLeod Company Ltd. We offer debt management and credit counselling services that can help you get your financial affairs and pay off your debts. If you can’t come to us in person, we offer virtual appointments.

Contact us to schedule a confidential consultation with one of our licensed insolvency trustees.


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