If a loved one dies, who will pay their debts?

Losing a loved one is hard enough. To avoid adding money management to your misfortune, here are some important things to know about debt and inheritance.

Summary

Inheritance is all the property a person leaves to his or her heirs. But when a person dies, they often leave debts as well. When these are greater than the assets left, the estate is said to be “insolvent.”
To avoid being held responsible for the debts of a person you inherit from, it is possible to refuse the estate.
Estate bankruptcy is another way to avoid inheriting debts.

How do you know if the deceased had debts?

If you have lost a parent or relative to whom you are the heir, you will need to quickly make an inventory of everything they owned and owed.

How do I find this information? The person who has been designated as the “liquidator of the estate” can contact the deceased’s financial institutions. This will allow him or her to list the deceased’s property (assets) and debts (liabilities).

Examples of assets and liabilities are as follows:

Assets:

Silver
Jewellery
Valuables (works of art, collectibles)
Furniture
Bank accounts
RRSPs and TFSAs
Life insurance
Real estate
Others

Liabilities:

Credit cards
Personal loans
Mortgage loans
Outstanding accounts
Municipal and school taxes
Taxes
Others

If the value of the deceased’s assets is greater than the debts he or she left behind, the estate is said to be solvent.

On the other hand, if its debts are greater than the value of its assets, the estate will be declared insolvent. In other words, in the case of an insolvent estate, you would be unable to pay off your deceased loved one’s debts, even if you added up all his or her assets.

The mistake not to make

It’s normal to want to recover things that have sentimental value to you. But don’t be too hasty.

Why? Because as soon as you recover or sell property that belonged to your deceased loved one (be it money, furniture, jewellery, a vehicle, etc.), you automatically accept the entire estate. And that includes debts and the responsibility to pay them.

There’s no point in rushing to get your hands on the goods. You have six months to research and verify the estate’s assets and liabilities.

What to do in the case of a solvent estate?

If the person you inherit has more than enough assets to cover his or her outstanding debts, you may decide to accept the estate.

Accepting the estate

In this case, you agree to pay the deceased’s debts, either by selling the property yourself to pay off the creditors or by assigning the property to the creditors.

Do you want to keep certain valuables (jewellery, works of art, collectibles, cars, etc.) rather than selling them or handing them over to creditors? You have the right to do so, but you will still have to repay the deceased’s debts, even if you have to pay them out of your own pocket.

What to do in the case of an insolvent estate?

If your deceased loved one has accumulated debts that exceed his or her assets, you are in a less advantageous situation. But you have options, such as renouncing the estate or putting the estate into bankruptcy.

Renouncing the estate

By renouncing the estate, you will not be held responsible for the deceased’s debts. However, you are also renouncing the deceased’s assets.

The family has the right to recover property that does not appear to have a market value: clothing, certificates, diplomas, souvenirs, photo albums, papers, knick-knacks and decorative objects.

Creditors, on the other hand, will get their hands on valuables, such as jewellery, collectibles, artwork, furs and other precious items, even if they have historical, family or sentimental significance for you.

Opting for bankruptcy

In the event of an insolvent estate, you also have the option of filing for bankruptcy of the estate, which relieves you of your deceased loved one’s debts.

Are you afraid of bankruptcy? Don’t worry. By putting an estate into bankruptcy, your personal record is not affected. And if the process seems complicated to you, rest assured that you will have help at every step of the way. A licensed insolvency trustee is responsible for communicating with creditors and liquidating the estate’s assets. And the amounts collected are used to cover the notary fees and funeral expenses.

Should I consult an expert?

If you find yourself faced with insolvent estate, it’s a good idea to use a licensed insolvency trustee.

You will have the help you need to make an inventory of your deceased loved one’s assets and debts. With your advisor, you will also be able to evaluate the various solutions available to you. And if you choose the bankruptcy option, you will have help at every step of the way.

Call us to discuss your options.