Losing a loved one is difficult enough. But what if your loved one leaves you with an insolvent estate? Keep reading to find out how to deal with inherited debts.
Is it possible to inherit debts?
The answer to this question is a bit convoluted. Technically, you cannot inherit any debts in Canada unless you’ve co-signed on a loan or have joint debts. If you have joint debts or have co-signed a loan for a loved one that has passed away, you will be responsible for paying off that loan. However, if you haven’t co-signed or had joint debts with your loved one, then you will not be held responsible for your their debts.
However, if the deceased owed money to creditors, they will have to be paid before the inheritance is distributed among family members/loved ones. They will be paid only after proving that they are owed money.
For example, if the deceased had 30,000$ in credit card debts, then the deceased’s assets will be used to pay off those debts. If there isn’t enough money in the deceased’s accounts, then they assets may be sold in order to pay off the debts first. Then, the rest of the money will go to the beneficiaries.
What happens if you’re being harassed by creditors to pay off your loved one’s debts?
Creditors do not have the right to contact you about paying off your loved one’s debts after they have passed away. But it’s not out of the realm of possibility for them to try. That’s why it’s of utmost importance that you know your rights.
A licensed insolvency trustee can guide you through the process of dealing with inherited debts and let you know what creditors/collection agencies can and cannot do. The most important thing to keep in mind is that you are not responsible for your loved one’s debts unless you have joint debts or have co-signed the obligation. It is highly recommended that you do not speak with creditors or collector agencies before speaking to your licensed insolvency trustee.
What happens if the deceased has more assets than debts?
If your loved one had more assets than they had debts, then you are in an advantageous position. In this case, you can agree to pay off their debts by accepting the estate and selling some of their assets. Once that’s done, the rest will become your inheritance.
The same rule can be applied to mortgage debts. A mortgage debt will stay with the house. That means that if you accept the estate, the mortgage will be put in your name. You can then choose to sell the house and pay off the mortgage. Whether or not the home will be passed on to you lies in the hands of the executor of the will, who will analyze the financial state of the estate and determine what the best course of action is with you.
What happens if the deceased has more debts than assets?
If your loved one had more debts than they had assets, then their estate will become insolvent. An insolvent estate means that the assets aren’t enough to pay off all the debts, so only a portion of the total debts will be paid. The rest of the debts will become “uncollectible” — again, you are not responsible for paying these uncollectible debts.
The manner in which creditors will be paid off depends on their priority. Certain creditors will have right to payment over others. The ones that have most priority are secured creditors, then unsecured “preferred” creditors, and finally unsecured creditors with no specific priority. Still, only a percentage of the debt will be paid.
What to do with an insolvent estate?
There are a couple of things you can do when you’re faced with an insolvent estate. Luckily, these won’t affect your financial situation. You can:
Renounce the estate
Renouncing an estate means that you are renouncing the entirety of the deceased’s assets (unless they do not have any market value such as photographs, certain clothing, achievements, etc.). However, you will also no longer be held responsible for any of their debts. Creditors will then have the right to take matters into their own hands and sell the assets to regain what they are owed.
Keep in mind that if you plan on renouncing the estate, you must never claim property and sell it before your creditors have had the chance to. Should you claim and sell some of the property, you will be considered to have automatically accepted the entirety of the estate.
File for bankruptcy
Although bankruptcy might seem like a scary solution, rest assured that your personal financial record will not be affected by it. In fact you would only be filing for bankruptcy of the estate (and not your own debts). If this seems like a viable option to you, contact a licensed insolvency trustee. They will guide you through the entire process and will be there for you every step of the way.
File a consumer proposal
Consumer proposals are best for those that already have debts and want to keep a portion of the estate. For example, if you already have a credit card debts and/or student loans and have now inherited an insolvent estate, but you still want to keep some of the assets, you can file a consumer proposal.
Filing a consumer proposal means that all of your debts, included the inherited debts, will be combined into one debt. The greatest benefit of a consumer proposal is that it allows you to keep your assets while also reducing the total of your debts by up to 70%, and creditors will no longer be able to contact you.
If you’d like to keep some of the deceased’s assets while ridding yourself of their debts as well as your own, then contact a licensed insolvency trustee. Your LIT will file a consumer proposal for you and will help you hold on to the memories you have of your loved one.