What happens to debt when you die?

When someone passes away in Canada, a final accounting of their assets and liabilities takes place. The purpose of this is twofold:

• To settle any debts outstanding from available assets
• To transfer any remaining assets to any beneficiary

Assuming the individual passed away with a last will and testament, then the above is a well followed process of probate (vetting the will and legally appointing the executor of the estate), followed by a sale of any assets and final distribution of value.

Often, the individual may pass away with more debt than available assets to settle those debts, and so a call to a Licensed Insolvency Trustee from the executors may follow for advice on how they should proceed. The common concern is that the beneficiaries (often close family members) and/or the executor of the estate are personally liable for the debts of the deceased. Beneficiaries of an estate are not personally liable for the debts of the deceased, unless they co-signed the debt or are joint borrowers. Executors can be held liable if they distribute assets to the beneficiaries without first settling any outstanding debts.

A common misconception is that “debt dies with the individual”. This is incorrect as the deceased’s estate becomes responsible for paying the debts. If there are insufficient assets available at the time of passing, then they are unlikely to be paid in full.

Here are some basic guidelines for executors:

• Sell all assets and hold all the proceeds in an estate bank account
• Ascertain all debts owed by the deceased (this can be difficult to do as information may be unavailable or difficult to locate)
• File outstanding tax returns and pay any taxes due
• Inform the creditors that the borrower has passed away and distribute any final payment.
• If there are insufficient assets to pay the debts in full then it may be prudent to use the services of a Licensed Insolvency Trustee. Once a Court order has been obtained, the Licensed Insolvency Trustee can file the deceased into bankruptcy. They will take care of all accounting of assets and liabilities, tax filings and stop any court proceedings. Moreover, the executors of the estate cannot be liable for any incorrect distributions since these will be carried out by the Licensed Insolvency Trustee.

Taylor Leibow Inc. are Licensed Insolvency Trustees and have been helping individuals and businesses with their financial and debt issues since 1947. If you would like to talk to Kathy Lenart or Jeff Lewis about the financial issues of a deceased person and how they can help, reach out to them at freshstartnow.ca