It’s a common sentiment that we don’t want to burden our loved ones when we pass away. But despite all good intentions – many Canadians will die in debt.
If you die with debt in Canada, does your spouse or kids inherit your debt or does it simply disappear when you do? Which of your debts have to be paid and how is your estate affected?
Licensed Insolvency Trustee, Derek Chase, tackles these questions and explains what you need to know if you are in debt or an executor of a loved one’s estate. Derek also answers the following questions:
- What kind of debt doesn’t have to be paid?
- What happens when there are no assets to sell to pay debt?
- Can the estate of the deceased go into Bankruptcy?
- How does the Canada Revenue Agency handle the debt of the deceased?
- At what point do you need professional advice?
Licensed Insolvency Trustees are licensed by the federal government to provide debt advice. You can be assured that the advice you receive from them will be unbiased and have your best interests in mind.
Read the Transcript
Wayne Kay 00:04
Welcome to another edition of the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.
I’m Wayne Kay. Coming up in today’s show, what happens to your debt when you die? Who pays the debt of a deceased person? What should you do if you’re the executor? Does the spouse or other family members of a deceased person have to pay the debt?
We’re going to learn about that and a lot more. My guest today, Derek Chase. From Derek Chase & Associates Licensed Insolvency Trustee serving Vancouver Island Sunshine Coast to BC and the BC North Coast. Thanks for being here, Derek.
Derek L. Chase 00:48
Hi, Wayne. It’s great to be here today.
Wayne Kay 00:50
Thanks very much for joining me. I’m looking forward to our discussion because this happens, this happens every single day across our country where somebody passes away and there’s a lot of debt and we don’t have any idea what to do with it. So I’m looking forward to it.
Derek L. Chase 01:10
Yes, I agree. I think it’s a very practical topic because like you say, it does happen. It often just happens to a person not dying, but the person dealing with it deals with it maybe once in their lifetime. So there’s a lot of unknowns and it’s good to get some background as to what you’re facing. If it’s in your life, you just don’t get that repetition to get good at it.
Wayne Kay 01:36
No kidding. And that’s it. And we’re already in the mourning process as well, so it makes it even more difficult. So it is a sensitive topic, but it is a topic that, as we said, happens every single day across this country.
I wonder what the stats are. Are there any stats? I’m throwing this at you cold – about the amount of people that pass away with debt.
Derek L. Chase 02:00
No, I don’t know those stats, but certainly we do see it over the years where someone has a considerable amount of debt when they die. Other times I’m sure people just have very modest sort of normal amounts on their credit card or whatever.
But what we’re talking about today is situations where the debt is an issue and oftentimes it’s a surprise to the people who are trying to deal with those matters after the person has passed away. And yeah, so there’s some good takeaways from today so that people can go forward in a way that is correct and also not a panic situation.
Wayne Kay 02:43
I guess this is important for family members to have the discussion before this happens, to find out how they’re doing. Like my grandma, she just passed away, but my aunt was co-signer on everything and on all of the banking, so she knew exactly what her situation was, which was a good thing.
Derek L. Chase 03:05
Yes, I agree. That would be the ideal situation. If there’s good communication within the family and people are aware and you can talk about things ahead of time and just have that preparation. But unfortunately, that’s not always the case.
Unfortunately, sometimes people are very private and they don’t want to talk about that or they’re embarrassed to bring it up and then all of a sudden the executor or the family is left trying to clean up, so to speak.
Wayne Kay 03:36
Yes. So who has to pay the debt of a deceased person? I’m assuming it just doesn’t magically go away.
Derek L. Chase 03:44
Well, sometimes it does. It really depends upon the person’s estate and what their assets are. And so if a person passes away, they’ve got significant debt or quite a bit of debt, but they have no assets, then nobody’s going to pay that debt. The estate has no assets to pay the debt, so the debt is not paid.
And I think it’s important to know that because collectors or sometimes lenders will try to pressure the family to make payments on the debt. And we’ve seen some real tragic situations where the surviving spouse is making payments on the deceased spouse’s debt, even though they don’t have to. And it had a huge impact on that person’s life that I can remember. So it’s not always the case that the debts have to be paid and sometimes the estate is simply just empty.
Wayne Kay 04:42
I didn’t realize that. So I’m already learning on this show. That’s what I love about this show. There’s so much great information. But if you’re married, you’re not responsible for your significant other’s debt.
Derek L. Chase 04:55
No, to be responsible for debt, you have to be a co-signer or a guarantor. So even in, not a deceased situation, if a spouse or a significant other is getting pressured to pay a debt, we always recommend that they ask to see where they have signed for that debt. Show me where I co signed for that, show me where I guaranteed it. And if a creditor can’t show that, then they can’t collect, they can’t pursue them for payment. So it’s important to know whether you’ve signed or not.
Wayne Kay 05:32
Yes, because a lot of times you don’t remember.
Derek L. Chase 05:36
Now in other situations where an estate does have assets, then it gets more complicated because certainly in BC, anyway, you can’t be distributing assets out of an estate to beneficiaries if there’s still debt in the estate.
So as an executor or an executrix, what we would recommend is that you get some legal advice straight away on that. But basically the deceased estate has to pay its debts before you can start giving out an inheritance. And otherwise in your role as executor or executrix, it’s my understanding that you could become personally liable for the debts if you’re distributing assets to beneficiaries while there’s still debt.
Wayne Kay 06:29
I’ve seen this in families as well, where as soon as somebody passes away, they’re trying to get into the money to start giving that away, give it away the inheritance immediately. But I think legally, aren’t you supposed to wait pretty much a year. I’m not 100% on that, but one would think you’d have to find out about what the debts are.
Derek L. Chase 06:49
Yes, I guess we both have to be careful here. Not to be offering specific state legal advice, but I think that’s one of the reasons why estates take a long time to wind up is because there is a caution. You want to be careful not to distribute before you know everything that’s going on.
And so there can be a certain amount of time that lapse just to see if anything comes out of the woodwork. As far as creditors, you also want to have some assurance that there’s not going to be a big income tax bill. So these things all take time and that’s why inheritances often take years before they’re actually paid out. There’s things to potentially assets to be sold and taxes to be paid and everything has to be accounted for before the distribution is made.
Wayne Kay 07:44
Are there other things we need to be aware of if you’re the executor of an estate?
Derek L. Chase 07:50
Well, I mean, first of all, you don’t have to agree to be an executor. Even though someone has put you in their will to be an executor or an executrix, you don’t have to agree to do that role. You can say, no, thanks, because when you take it on, you’re really taking on potentially a big job there. So that’s one thing to know.
And then I think that the next thing is, like I mentioned earlier, is you immediately want to get some good legal advice and accounting advice, really, on what it’s going to take to deal with this estate.
Wayne Kay 08:27
So let’s talk about the spouse and family members of a deceased person. They’re not on the hook at all, then, for any kind of a debt, if they did not sign for it.
Derek L. Chase 08:39
That’s our understanding of it.
Wayne Kay 08:41
Yes. Okay, well, that’s good to know, especially when you say that it does happen where they do want that money and they still come after people and maybe you wouldn’t know. Right, so that’s a good thing. What happens to the assets of the deceased person when they have debt?
Derek L. Chase 08:59
Well, firstly, the estate assets would have to be used to pay off the debt. I guess I can give some examples of when we’ve become involved in little larger situations, perhaps when there are assets to be dealt with, but there’s more debt to be paid than what the assets are worth.
So technically, the estate of the deceased is insolvent. And so the executor looks at this, they say, oh my gosh, I don’t want to deal with this mess and I’m not going to be distributing anything to the beneficiaries anyway. So the executor can actually assign the estate into Bankruptcy.
Now, there’s a bit of a process there. The executor does need the approval of the court to do that, but it is potentially a practical thing to do if there’s lots of debt, but there’s still some assets to be handled and the executor just does not want to handle it. So they’ve assigned it into Bankruptcy and then in our role as Licensed Insolvency Trustee, we wrap that up and distribute what we can out to the creditors.
Wayne Kay 10:11
Okay, so when it comes to this, I didn’t even know that you could declare Bankruptcy after the fact. That’s quite interesting. So it would have to be a pretty bad financial situation or just not enough funds to cover. And then let’s do some math here.
So we’re saying there’s $100,000 in debt and the assets are only $75,000. Something like that would then go into Bankruptcy or what would happen or give me an example of the numbers you’re talking about.
Derek L. Chase 10:46
Well, every situation is a little bit different and it’s probably not done for putting an estate into Bankruptcy. If the numbers are really small in those sorts of settings, we would recommend that, firstly, again, a person gets legal advice.
But a practical thing to do can be to send notice to the creditors saying that this estate has no assets and is insolvent and just have a communication that way. But I guess everything’s relative. So numbers are – some numbers are bigger to people than others.
But we’ve done situations for dealing with a Bankruptcy, for the estate of a deceased, for assets ranging anywhere from, I don’t know, it’s all relative. Some people are, even in life, some people are feeling they’re going to jail if they owe $12,000 and other people are quite comfortable owing a million.
It’s all a matter of perspective and what you’re comfortable handling. So I can’t really cookie cutter that for an answer.
Wayne Kay 12:10
Well, that’s all right, we tried anyway. If I’m listening to this, I’d start thinking, okay, well, what kind of numbers are we talking about here?
Derek L. Chase 12:17
Yes, I think the go to answer there is getting the advice, having the conversations with the CPA and with the lawyer and even having a meeting with the Trustee and saying, which way can we go here? What’s the best way to handle this?
And then, as you said earlier, you’re kind of in a fog anyway because of this event that just happened and you need some professional advice making these choices. So really lean on those people that have seen it before and can give a good perspective as to what’s the best course of action.
Wayne Kay 12:52
How about the CRA? Let’s end by talking about them. How do they deal with this situation?
Derek L. Chase 12:59
Yes, the CRA, Canada Revenue Agency. They’re basically an unsecured creditor if taxes are owed. And there’s a variety of income tax returns that can be filed when a person passes away, depending on when in the year they’ve passed away. So it does take some time for the dust to settle in many situations to see what amount of debt, if any, is owed to the income tax department.
Many times I hear my CPA colleagues talking about getting a clearance certificate from CRA in order to be sure that nothing is owed before they will move on to the distribution phase of an estate. So I think it’s worth getting some assistance from a professional accountant when you’re dealing with an estate that, especially if it’s got some complexity to it, I wouldn’t recommend an executor take that on themselves if it’s at all complex.
Wayne Kay 14:03
So what’s your recommendations then for us in life as we’re getting maybe up there in age? I mean, obviously this can happen at any age where somebody passes away, but I’m going to make the assumption that if you do have the time, what’s the best thing you can do to set your family up so they don’t have this problem?
Derek L. Chase 14:23
Yes. So have some good conversations ahead of time, certainly have a will and also let people know where the will is. That’s another big one. But if you do those things, then it’s going to be as easy as it can be for the executor.
So it’s a very good thing to do to have those conversations ahead of time and have things written down. If not, if it’s the other way around and you’re the executor looking at a mess, then you need some professional advice and reach out sooner rather than later to the lawyer, to the accountant, and even potentially to the Trustee.
Wayne Kay 15:03
Terrific. Derek, anything else you need to mention?
Derek L. Chase 15:07
I don’t think so. It’s a topic that does come up, so it’s good to know these things, I think.
Wayne Kay 15:14
Absolutely. Right on. Well, thank you very much. Thanks so much for your time today, Derek. Appreciate it.
Derek L. Chase 15:20
Yes, my pleasure.
Wayne Kay 15:22
Well, my guests today, Derek Chase, and if you want to learn more or schedule a free consultation with Derek and his team, you can head over to the website, bankruptcytrusteebc.ca.
And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.