The passing of a loved one is an incredibly trying time in someone's life. And it only becomes more difficult when you’re worried about creditors breathing down your neck and new bills being dropped at your doorstep.
In this article, we break down what is inherited debt, how it works, the most common forms you can expect to see, and how to prevent yourself from inheriting debt in the first place.
What is Inherited Debt and Exceptions to the Rule
Inherited debt is taking on the debt your loved one once had. This is a serious concern for many Canadians who already have so much on their plate. Thankfully, you cannot inherit debt in Canada with only a few exceptions. That means you will not take on the debt of your loved ones or pass on your debt to your loved ones if you were to pass away.
Instead, the remaining debt will be paid back to the creditors in order of importance using assets. That also means that debts will have to be settled before an inheritance is given to surviving beneficiaries. You might wonder, what happens if the assets do not cover all the debt? If someone has more debt than assets, their estate becomes insolvent and only a part of the debt will be paid out to various creditors based on who has the most right to the payment. In any case, always seek financial advice and understand your rights before moving forward with the debt process.
Now we mentioned exceptions to inheriting debt earlier but what are those exceptions?
The main way that you might find yourself inheriting your loved one’s debt is if you were a co-signer or had a joint account. In this case, you will remain legally responsible for the debt that is remaining. For example, joint accounts for credit cards.
As for mortgages, it stays with the house. What that means is if your loved one passes away and you inherit the estate, you will also inherit the mortgage. However, that doesn’t mean you inherit its debt. There are different options you can take if you ever find yourself in this scenario. You can take ownership of the house and assume the mortgage as your own. You can sell the house to help pay off the mortgage. And you can even speak with your financial advisors to find a way to adjust your mortgage.
Common Types of Inherited Debt
- Car Loans
- Credit Card Debt
- Medical Debt
- Mortgages
How to Prevent Inherited Debt
Setup a repayment plan: the best way to ensure your loved ones don’t inherit your debt is to not have any debt at all. Speak with a financial advisor as soon as possible for guidance on repaying your current debt. Our advisors are experts at helping you manage your expenses and make more out of your investments.
Consider life insurance: the first step you can take to avoid passing on debt to your loved ones is having life insurance. This makes sure that costs are covered in the case of your passing so your loved ones aren’t stuck paying off debt you may have accrued.
Talk to your loved ones: this is the most stressful step you can take but it’s a necessary one. Speaking with your loved ones keeps everyone in the loop on assets, debts, and on who will likely inherit what.
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