Some people can expect big inheritances when their parents pass away. But when the talk of the town is the record levels of debt Canadians are holding, not to mention how many people are expecting to enter retirement owing money on their mortgages, lines of credit, and credit cards, I’ve been hearing this question more and more: “Am I responsible for my parents’ debts?”
With longer life expectancies, portfolios that have been beaten down by the recent global economic carnage, and projections for steep increases in healthcare costs, it’s not a stretch to imagine senior citizens with debts that they may never be able to pay off. What if dear old dad has $50,000 in credit card debt when he meets his maker? Can he leave that to his children?
Debt cannot just be left to someone in a will. Imagine how many people would saddle their ex-spouses with debt out of spite.
Any debts one has when they die generally get settled by their estate before being passed to their beneficiaries. So if there was $100,000 in assets and $25,000 in debts, then $25,000 of assets get liquidated to cover the debt and $75,000 remains to be distributed to the beneficiaries. If the debts are greater than the assets, then the beneficiaries get nothing and the creditors have to write off a portion or all of the debts as bad loans.
It is possible that a creditor can call up a deceased’s beneficiaries and demand payment for the outstanding balance. But that does not oblige them to pay it, no matter how many times they call or how many threatening letters they send.
In general, you cannot inherit debt unless you have previously accepted responsibility for it.
One way to do that is to agree to be someone's co-signor. Suppose your child gets denied a credit card. To help them get it, you co-sign for them. Fast forward a few years and they've racked up $25,000 in debt. If they die, then you are on the hook for the whole amount because you previously accepted that responsibility.