I felt at least two earthquakes in July, the first of which was the largest to hit Southern California in two decades. An obvious but unfortunate consequence of this was that I spent the rest of the summer thinking about death — specifically, what would happen if either me or my partner died. Cheerful, I know! Whichever one of us survived would miss the other one... obviously. But when you live in an expensive city, it’s hard not to also think about the financial consequences of your partner’s death — especially if, like us, you’re married.
Between the two of us, we have accumulated 14 years of post-secondary education, so while voluntary, our debt load is much bigger than the amount of money we have stored away in savings. I told my partner that if he died, I would probably spend a good chunk of my life toiling away to make payments on our combined debt. Dying, I added, was not only unacceptable, but unfathomably rude. “But you can’t inherit debt!” he told me.
“How do you know that?” I countered. “Are you an expert?!”
The answer, as I cunningly suspected, was no. But it didn’t take me long to realize another damning fact: neither was I.
So, in the spirit of being fair, I decided to consult one. Below, Doug Hoyes, licensed insolvency trustee and co-founder of Hoyes, Michalos & Associates Inc. in Toronto explains whether or not debt is inheritable, and how to best manage your finances after a loved one passes away.
Can you inherit debt?
As it turns out, my partner was right. In Canada, you can’t inherit debt — at least not in any straightforward way.
“Let’s say that I owe a lot of money on my credit card,” says Hoyes. “And in my will, I include a clause that says, ‘When I die, Jessica has to pay it.’ That’s not a thing. You can’t put debt in your will. Because I would be forcing you to take on something that you didn’t agree to take on.”
The only way you could be responsible for someone else’s debt after they die, Hoyes adds, is if you had co-signed for it in the first place. “A common example would be a husband and wife have a joint line of credit,” says Hoyes, “And they both signed for it. If the husband died, then yes, the wife is responsible for that debt. But it’s not because she inherited it — it’s because she signed for it.”
Inheriting assets that haven’t been paid off
There is one way, however, for you to wind up responsible for debt that you didn’t initially sign up for: if you inherit — and agree to assume responsibility for — an asset that hasn’t been paid off in full.
This happens most commonly with property. Let’s say your parents pass away, and leave you their house — but they haven’t paid off their mortgage. If you want the house, you’ll become responsible for the mortgage, too. “The asset already has that mortgage on it,” says Hoyes. “So if you get the asset, you get the liability as well.”
If, for whatever reason, you decide you can’t take on the remaining debt, you have two choices: you can take the house, sell it, and use the proceeds to pay back the lender. Or, you can refuse the inheritance altogether.
“You never signed for the mortgage, so the bank can’t force you to take it over,” says Hoyes. “You would just say, ‘Yeah, no thanks — I don’t want it.’ You wouldn’t actually take over ownership of the house; you would simply say to the bank, ‘Well, there you go, guy — there’s the key to the house, you can have it.’”
Joint debts are a different story
If you did sign up for joint credit — say, a mortgage with your partner, or a joint credit card or line of credit — and your partner passes away, then there’s bad news for you: you are responsible for paying off the rest of it on your own.
Still, there are ways to protect yourself. If your joint debt is secured, meaning it’s tied to an asset, like a home, and you can’t afford to pay it off on your own, then you can sell the asset and use the proceeds to pay down the debt.
For unsecured debt, like a joint credit card or line of credit, the solution is less straightforward: there isn’t anything you can sell against the debt. But there is one thing you can use to help you with payments: life insurance (this applies to secured debts, too).
“If you have a life insurance policy that pays out when your spouse dies, then you could use the money for whatever you want,” says Hoyes. “The planning point would be to have life insurance sufficient to meet whatever obligations you think you would have if your spouse was no longer there.”
While there are many financial products that claim to cover unpaid debts in cases of emergency, Hoyes says, it’s important to do your research and compare, because not all of them are made equal.
“It is possible that credit card companies will also sell you credit card life insurance, disability insurance, that sort of thing,” he says, but “they tend to be pretty expensive.. You’re usually better off buying something like that from a life insurance company.”
With mortgages, for example, it’s common for lenders to also sell you mortgage life insurance, which is designed to pay your outstanding mortgage balance if you pass away. But, Hoyes says, these policies tend to be more expensive than a regular life insurance policy — even though they can be used to achieve the exact same thing. Plus, like other balance protection products that have the potential to do more harm than good, mortgage protection insurance can also wind up costing you long after the mortgage is gone.
“A common way to do it would be to have life insurance sufficient to pay off the mortgage,” says Hoyes. “So rather than get a million dollar policy on your spouse, which costs more, if there’s $300,000 left on the mortgage, I’ll get a life insurance policy for $300,000.”
The bottom line
So, there you have it. You can’t inherit debt that you haven’t previously consented to. And if you did co-sign on a loan, or accept a house with an outstanding mortgage, well, there are ways to prepare for the payments you’re about to inherit — so the best decision you can make is to act as soon as possible.
“The key point,” says Hoyes, “is you’re responsible for whatever you sign for.”