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What happens to my debt when I die?

Guest Post by Craig Sebastiano from Ratehub.ca

Death happens. Before planning your will, you’ll likely spend a lot of time trying to decide what happens to your assets after you’re gone. But, what happens to your mortgage and other forms of debt when you die?

Debt after death

The good news is your debt can’t be inherited by your spouse, partner, or another family member in a will. However, if one of them is a co-signor on a debt, your estate and the living family member are legally responsible for the debt.

Your debt includes your credit card, lines of credit, mortgage, car loans, as well as unpaid bills, taxes, and payments. If there’s a co-signor on your mortgage, you may want to use a mortgage calculator to see if they can afford to pay the mortgage on their own.

The role of a will

A will is used to distribute your assets, not your debt. However, money can’t be distributed to your heirs until all of your debt is paid off. If there isn’t enough cash, assets will need to be sold to pay off debt. The remaining assets can then be distributed to your beneficiaries.

Dying without a will can cause a lot of trouble for your family because provincial or territorial law will decide how your assets are distributed. Having a will allows you to decide who receives certain parts of your estate, name a guardian for any of your children who are minors, protect a common-law spouse, and choose an executor for your estate. A will can also minimize any family disputes.

Planning a will

There are a number of things you need to consider before drafting a will.

First, you’ll want to choose an executor. You can also name a co-executor if you wish. He or she will manage your estate after your death. You can choose a family member or friend. Just be sure to ask them first to find out if they’re comfortable taking on the role.

Second, you have the option to make bequests, which are specific items of personal property. Maybe you want to leave your car to a niece or nephew, your prized coin collection to a friend, or a small sum of money to a long-lost relative.

Third, you can choose to split the rest of your estate to your spouse, children, and charities of your choice. If your children are minors, you may want to choose an age at which they’ll inherit your assets.

Finally, there are other things to consider, such as naming a legal guardian for dependent or disabled children. It’s best to speak with a lawyer first to help guide you through the process.

Making life easier for loved ones

If you’re worried that your estate won’t have enough assets to cover your debts, you should consider buying life insurance, creating a larger emergency fund, or paying down your debt as quickly as possible.

If you have debt on one of the best credit cards in Canada, it’s possible to purchase credit card insurance. For example, CIBC offers life insurance on its credit cards of up to $25,000. However, it won’t be paid if you’re age 80 or older.

Whatever you do, you don’t want to have debt in retirement. Your income will more than likely be significantly lower than it was when you were working, making it harder to pay down debt in your golden years.

The bottom line

Having debt when you die means it can take a while for your beneficiaries to receive proceeds from your estate. If you have more debt than assets, your loved ones will end up with nothing after you’re gone.