What happens to debt after death?

No one wants to think about money after losing a loved one, but it can be a cause of stress and confusion for family members. One concern that we often hear is what happens to debt? To bring some clarity, we’ve answered some of the most common questions people have about death and debt.

How’s debt handled after death?

Debt doesn’t disappear when someone dies. Instead, it’s settled with the deceased person’s estate. The estate includes all assets, like vehicles, properties, savings, investments, and more. The estate executor is appointed in the will and is responsible for communicating with creditors and seeing that all debts are paid off before any assets are passed down to family or friends.

If there’s no will or no executor is named, family and friends can ask the court to be appointed to the estate. If no one comes forward or all family and friends refuse the role of estate executor, then the court may appoint a public trustee to handle the estate.

Who’s the executor of the will?

The estate administrator or executor of the will is an individual appointed to handle the affairs of a deceased person. This could be a friend, family member, or legal counsel/company. The executor is responsible for settling the deceased person’s finances including debt, inheritance, and their final income tax filings.

What if the estate has more debt than assets?

If the estate doesn’t have enough funds to settle their debt, then it’s considered insolvent. In this case, the estate must prioritize which debt are paid off in a specific order:

1. Government debt: Any government debt, such as income tax or benefit repayment, must be settled before all other debt.
2. Secured debt: Mortgage, car loans, or any other debt attached to an asset are paid next. If there aren’t enough funds in the estate, secured lenders may reclaim the asset to satisfy the debt.
3. Unsecured debt: Credit cards, personal loans, payday loans and other unsecured debts are last to be repaid. In the case of an insolvent estate, these debt may be partially repaid or written off.

If an estate is insolvent, it’s unlikely that surviving family or friends will receive anything from a will or inheritance as all assets must be evaluated by the executor of the will to pay creditors in full.

Can you inherit debt?

No. All the deceased person’s debt must be settled with their estate or be written off. It’s illegal for creditors or debt collectors to contact anyone except the estate executor about the deceased person’s debt. However, it isn’t unheard of for creditors to contact family members about repaying a passed loved one’s debt. Unless you have signed for the debt as a joint debt, guarantor, or cosigner, you’re not obligated to take over payments.

What happens to joint debt after death?

Joint, co-signed, or guaranteed debts are the only circumstances where you might be responsible for a deceased person’s debt. Lenders may handle this differently, so it’s important to communicate with any joint creditors.

Like other lenders, joint creditors might pursue the estate first, but if the estate is insolvent, they may contact you to continue payments. Make sure to review your paperwork and refresh yourself on what debt you’re responsible for. Make sure you understand your legal obligations and how to communicate with creditors.

In cases of joint debt and death, it’s recommended you talk with a lawyer or Licensed Insolvency Trustee (LIT) to understand your rights and financial situation.

What financial affairs should be put in order when someone dies?

Handling financial affairs is primarily the responsibility of the executor of the will. However, as a family member or friend, other responsibilities like funeral arrangements and moving the deceased person’s belongings may fall to you. These affairs can be expensive and, if an estate is insolvent, the costs may land on you.

The loss of a loved one can take a heavy emotional and financial toll. If you’re struggling with debt or are an executor handling an insolvent estate, we can help. A Licensed Insolvency Trustee can review your debt and recommend a personalized debt solution to help you find a fresh start and time to focus on what matters. Call today for your free no-judgment consultation or book online.