what happens to your debt when you die

Leaving Debt Behind: What Happens to Debt When You Die

  • By Bonnie Hooley, LIT

Dealing with the death of a loved one is hard. The Executor finds sorting through all the required paperwork just adds to the weight of the situation. This is particularly true when the Executor is a close friend or family member, which is often the case. Unexpected surprises are not always welcome. Do you know what happens to your debt when you die?

Mary had just gone through the worst few months of her life, or so she thought. After forty years of marriage, her spouse had recently been diagnosed with severe cardiomyopathy. Over only a few short months, she saw her vivacious spouse’s health deteriorate until he passed in early fall. To take her mind off the grieving process, as sole executor and beneficiary of the estate, she decided to start going through the myriads of paperwork required to be dealt with as executrix.

Unexpected and Unwanted Surprises

She found his life insurance policy that named her as the beneficiary. Once again she was thankful that her spouse had been so careful in looking after the family affairs. The policy wasn’t large, but was enough to sustain her in the frugal lifestyle she was comfortable with. Thankful that he had ensured she would be looked after in the difficult days ahead, she continued through the paperwork.

It was then that she found another paper, from Canada Revenue Agency (CRA).  What she saw couldn’t be right?! It was an assessment, made out to her husband, dated only six months prior. The assessment indicated he owed nearly $200,000.00! This had to be a mistake. He had never mentioned owing CRA money. They had always lived frugally and were careful with their spending. They donated to charities and often got tax refunds. There had to be an error!

She immediately called CRA to get things straightened out. She was devastated at their response.

Yes indeed, the money was owing. CRA had reassessed some of the charitable giving they had done over the past number of years and had retroactively deemed that there was tax owing. With penalties and interest, it had accumulated to nearly $200,000.

She was overwhelmed. What did this mean? Was she now responsible for this debt? Was the life insurance policy she was relying on for support going to now be seized?  Where could she turn for help?

Where to Go

LCTaylor has received this call and many others quite similar. Often the calls come from children who have lost a parent, or from an overwhelmed Executor.  They are often surprised to find the dad that had been bailing them out for years had done it at great expense to himself, and had been paying heavily for it on his credit cards.

We have also received these calls from estate lawyers, who have had these families come in seeking guidance. They have often started the wind up process but want to ensure the shortfall is dealt with in accordance with legislative priorities.

Different families, but similarities in their situation: unaware of debt the deceased was carrying prior to their passing; estate assets insufficient to cover the debt; questions about who is responsible to pay these debts; questions about the Executor’s and family members’ responsibility and personal liabilities concerning death and debt. These executors are looking to find out what debts are forgiven at death and if not, how can they pay off the unpaid debt?”

There are very few professionals out there to assist. A lawyer may be able to assist to some extent, but are there funds to cover the legal expenses? The Executor could try to muddle through as best they can, but can open themselves up to personal liability if they get things wrong. After all, the Will doesn’t generally anticipate this scenario and there really is no “Executor Guidebook” for this situation.

The Bankruptcy & Insolvency Act anticipates these scenarios and has provided provisions for Licensed Insolvency Trustees to help out in these situations.

There is Help

It is not uncommon to seek the advice of a Licensed Insolvency Trustee (LIT) when someone you know has died, leaving more debts than assets. Just like assisting living individuals with their debt burden, LITs are trained to deal with estates struggling the same way.

A LIT can assist with developing a Statement of Affairs of the debtor. A list of what assets remain and debts that have accumulated. They can then make an application to court to get approval to put the estate into Bankruptcy.

The Trustee will then assist the Executor in assigning the estate into Bankruptcy so that the Trustee can take over from there.

The Trustee will notify the creditors of the death and the Bankruptcy. They will then liquidate the assets available for the creditors in accordance with legislative protocol.  The Trustee can file all returns to be filed upon their death. Finally, the Trustee will ensure that funds from the assets are distributed in accordance with the legislated priorities.

There are Benefits

The benefit of assigning this to a LIT to deal with is that it not only removes a stressful burden off the Executor’s hands, it also ensures there is legislative compliance so that the Executor will not be accused later of mishandling the estate. The last thing the Executor needs is to be personally sued for not ensuring the assets were disposed of in accordance with legislative requirements. A LIT knows what happens to your debt when you die and can help the executor understand their rights and responsibilities in the situation.

The Trustee deals with the questions from creditors, governing authorities and beneficiaries. They can also answer all the questions the Executor has throughout the process.

The Trustee takes what appears to be a devastating situation and turns it into a manageable solution, by carrying the load.

There is Hope

Mary called LCTaylor and we listened to all she was going through. We empathised with the devastating year she was having and we offered her hope. We took over the administration of the deceased estate. We dealt with CRA and all other creditors her spouse had left behind. Surrendering to us a situation that was overwhelming for her, relieved her stress. Solving these problems is what we are trained to do.

Mary was able to move on with her grieving, and retain the life insurance policy she had been left. She could focus on her children and grandchildren, rather than spending her remaining years muddling through a mess. She was able to leave the tedious stuff to us. We were there for her.

If you have a situation that you think we could help with, give us a call at 204-925-6400 or send an email to questions@lctaylor.net. You can also book a free consultation on our website.

Bonnie Hooley, LIT

Bonnie has worked in the insolvency field since 1980. She is a graduate of the University of Manitoba, with a degree in Social Work. In 1999 she attained her license as a Licensed Insolvency Trustee. Bonnie has her Foundation Studies in Accounting from the Certified General Accountants (CGA). She is Read More Bonnie has worked in the insolvency field since 1980. She is a graduate of the University of Manitoba, with a degree in Social Work. In 1999 she attained her license as a Licensed Insolvency Trustee. Bonnie has her Foundation Studies in Accounting from the Certified General Accountants (CGA). She is a member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and Past President of the Manitoba Association of Insolvency and Restructuring Professionals (MAIRP). Bonnie has served on various boards within her community. Her hobby is quilting, her passion is Christ. Close

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