Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.
If you were to die tomorrow, how would it affect your family’s finances?
Losing a loved one is never easy. What makes it even harder is when this loss is compounded by uncertainty about what happens to their debts.
Questions like, “Am I responsible for my parent’s credit cards?” or “Will my spouse’s loans become mine?” are common; and survivors may feel guilty for even considering the impact to their own financial situation in the wake of a loss.
Below, I’ll explain what happens to common types of debt after someone passes away, laws that govern repayment, and lay out some practical steps you can take now to protect yourself and your family ahead of time.
How debt works after death in Canada
In Canada, debts generally don’t automatically transfer to family members.
While they don’t simply disappear, they also don’t immediately become the responsibility of surviving family members. Instead, they’re settled through the deceased individual’s estate. There are some exceptions for co-signed loans or joint accounts, but knowing how this process works can help you avoid unexpected financial stress during the challenging time following the loss.
After a death, an executor who is named in the will (or appointed by the courts if there is no will) is responsible for managing the process of debt repayment and dividing assets. They gather the deceased’s assets, settle debts in a specific order dictated by provincial laws, and finally distribute the remaining estate to the heirs.
Outstanding debts are generally settled through the deceased person’s estate. This includes any money, property, or assets they leave behind. Before anything can be distributed to beneficiaries, these assets are used to pay off outstanding balances. If the estate doesn’t have enough to cover all debts, creditors often write off the unpaid balances.
That being said, there are exceptions.
Any loans or credit cards that were co-signed, jointly held, or guaranteed by another person will still be legally binding on the surviving borrower. This means a surviving spouse, child, or other relative could be required to continue making payments if their name and credit are attached to the account.
Common types of debt and what happens to each
Not all debts are treated the same after someone passes away. The way a debt is handled often depends on its type, whether it was secured or unsecured, or whether another person was legally responsible for it. Here’s what typically happens to the most common debts.
1. Mortgages and home loans
If the deceased had a mortgage, it becomes part of the estate’s obligations. The surviving spouse or co-signer is usually responsible for continuing payments.
If the home was solely in the deceased’s name and there’s no co-signer, the estate may sell the property to repay the debt. In some cases, certain life or mortgage insurance policies may be able to cover a portion (or maybe all) of the remaining balance.
2. Credit card debt
Credit card balances are paid from the estate before any inheritance is distributed. If the estate doesn’t have enough assets, the debt is usually written off. However, joint credit card holders remain responsible for the full balance.
3. Auto loans and personal loans
Secured loans, such as an auto loan, allow lenders to repossess the asset if payments stop and the estate can’t cover the balance. If a survivor would like to keep the asset, they can usually work with the executor to take over payments for it.
Unsecured loans, on the other hand, are handled like credit card debt and paid from the estate if funds are available.
If a survivor happens to be a co-signer for either type of loan, full responsibility of payments will be passed on to them.
4. Student loans
Federal and most provincial student loans are typically forgiven when the borrower passes away. Private student loans, however, may still need to be repaid from the estate or by a co-signer if one exists.
5. Joint accounts and co-signed loans
When debt is co-signed or held jointly (i.e. a shared line of credit, loan, or mortgage), the surviving borrower becomes fully responsible for payments. Creditors can pursue them directly, regardless of what’s left in the estate.
How to prepare and reduce the burden of family debt
Taking a few proactive steps can make the estate settlement process smoother and reduce the risk of debts consuming valuable assets meant for your family.
A valid, up-to-date will ensures that your assets and debts are handled according to your wishes, making it easier on your surviving family and giving them time to grieve without being overwhelmed by financial burden.
It’s also important to name an executor, which simplifies decision-making and avoids delays that could increase legal or administrative costs. In the will, your named executor should have clear instructions for debt repayment to reduce confusion.
Life insurance policies can provide a lump-sum payment to cover outstanding debts like a mortgage, personal loans, or other liabilities. That being said, it’s important to choose a life insurance payout amount that can fully cover any assets you have, in addition to projected funeral costs.
Finally, if you’re married or have close family, it’s important to share login information and payment details for your personal accounts. Sharing these with close family members or your executor can streamline the process of handling post-mortem debts by allowing survivors to take over debts and contact creditors to notify them of the death.
Final thoughts
For many, thinking about and planning for death may not be a welcome or happy topic. However, it is an important one. Even if you or your loved one are in perfect health, it’s a good idea to have a plan in place in case something unexpected happens.
Creating a clear will and having open communication with a few trusted family members about your debts, obligations, wishes, and insurance policies can help your survivors navigate the difficult post-mortem financial landscape, giving them time to grieve and peace to move forward.
More from Christopher Liew:
