What happens to our personal debt when we die?

This article was originally written for and posted over at Planswell. The original article can be found here.

Shakespeare’s adage, “neither a borrower nor a lender be”, may have been good advice when he wrote Hamlet, but for many of us debt is a feature of modern life. People get into debt for all sorts of reasons: to fund further education, buying a car, purchasing a home, or to maintain a certain lifestyle. While many of us contend with debt while we are alive, it begs the question – what happens to our debt when we die?

When a person passes away, an essential aspect of administering that person’s estate is to ensure that any debts are paid off before assets can be distributed to their beneficiaries. It is true that you cannot inherit someone’s debt. However, if you have co-signed a debt, such as a mortgage, you are considered a survivor and you will be legally responsible for paying the joint debt. Also important to note, each creditor may have their own contractual rules that dictate who they can collect from, especially if other assets may have been offered as collateral to secure the debt. In some cases assets may need to be sold in order to pay off outstanding debts. Moreover, if your debts exceed the value of your assets your beneficiaries may end up with nothing. Many people use life insurance, to make sure there is money leftover in the estate to cover debts and pass on to beneficiaries. Some debt products, such as a credit cards, may offer insurance for an additional fee to cover outstanding balances in the event of the borrower’s death.

Debts are paid out of the assets from your estate

If you do not have a Will it can be a long and complicated process. Dying without a Will is calledintestate, and each province has their own laws regarding intestacy. For example, the province of Ontario statutes allow any person who is related to the deceased, or has an interest in his or her estate, to apply to the Ontario Superior Court to be appointed estate trustee or administrator of the deceased’s estate. Once the order for appointment is obtained, and following payment of the deceased’s debts, the balance of the deceased’s intestate estate is distributed in accordance with the Succession Law Reform Act of Ontario (the Act). If you die intestate, the law sets out the way your assets will be distributed. In this case, you will have no control over how and to whom your assets will be distributed.

If you have a Will, you can appoint an Executor. That person will be responsible for paying your debts and distributing your assets if there is anything leftover. A Will deals with what happens to your assets when you die, and not to how your debts get paid, therefore it is important to appoint a trusted and competent Executor to pay your debts and administer your estate expeditiously. This person, or persons if you appoint joint Executors, will be responsible for paying your taxes, serving notice to creditors, paying your debts, and distributing your assets to your heirs in the way you set out in your Will. It is an important job, which is why you should choose wisely and use this opportunity to have a conversation with that person about your final wishes.

Why have a Will?

A Will is a legal document that sets out how you would like your assets distributed. It allows you to appoint key people such as an Executor and Estate Trustee to administer your estate when you die. It does not detail how your debts will be paid – that responsibility lies with the Executor. But having a Will allows you to appoint someone who you trust and is competent to do the job right. Paying off debts can be a time consuming process, and having an appointed Executor can avoid delays in distributing assets to your heirs.

Creating a Will

Many people avoid creating a Will because it can be a complicated and expensive process, let alone emotionally uncomfortable. Given the control and peace of mind having this document can provide, getting one is worth considering. Another reason people avoid creating Will is due to the additional costs to make changes due to major life events such as getting married, or minor changes such as appointing a different Executor and Estate Trustee.

Unfortunately, many people are missing the peace of mind that comes from having these documents in place. In most jurisdictions in Canada, a legal Will can be created by generating a document with your wishes and following execution formalities, which include signing your document in front two independent witnesses. Because of the ease of creating a legal Will in 20 minutes online from the comfort of their home, OmCompany.com may be an accessible option for many Canadians. Om’s transparent pricing and ease-of-use in making a Will may remove some of the barriers and apprehension, and help make estate planning more accessible and empowering for everyone.