Debt and death: Who owes what to whom?

We all know that life’s only certainties are death and taxes. What’s less clear is the answer to this question: What happens to your debts when you die?

Some of them go to the grave, too.

“If you have unsecured debt, the debt’s going to die with you,” says insolvency counsellor Margaret Johnson, president of Solutions Credit Counselling Service Inc. “Nobody has to take it over and pay it. Debts don’t transfer by virtue of death or marriage.

“However, if you leave an estate, the executor of your estate will have to deal with any debt before assets are distributed to any beneficiaries,” she adds.

So let’s start with that unsecured debt, meaning anything that’s not backed by an underlying asset. Think credit-cards and utility bills.

The power of your signature

“Unless you have signed a contract or co-signed for something, you do not need to take over someone’s debt when they die,” Johnson says. “No one can leave their debts to you or to their spouse. Unless you have signed for the debt, it is not your debt.”

Be warned that aggressive creditors may try to guilt a spouse or children into paying someone else’s credit-card debt after he or she dies. Johnson reiterates the advice above: “Show me my signature.”

“If you’re contacted by a creditor to pay a debt that you do not believe you’re responsible for, request the creditor send you a copy of your signature on the contract,” she says. “Before agreeing to pay any debt, ask for proof that you owe it,” Johnson says. “If you don’t owe it, don’t pay it. It’s that simple.”

But remember: Things work differently if you have a will and leave your assets to specific people.

“Before any money can be distributed to heirs, all the proven debts must be paid,” Johnson says. “After the debts are paid, the remaining assets are distributed among the beneficiaries.”

If there aren’t enough cash assets to cover the remaining debts, things may need to be sold to pay them off.

Debt protection plans

What about buying insurance to cover your debt when you die?

“If the debt is going to go through your estate and the estate is going to have to pay it, then there’s reason to be concerned, especially if it’s a large debt,” Johnson says. “In such a case you may want to carry insurance; however, I recommend term insurance and not credit-card or debt insurance. These insurances cost too much.”

Just how much? According to CBC's Marketplace, premiums can range from around 30 cents up to $1.50 per every $100 of the balance you owe.

When it comes to credit-card protector plans, Johnson advises reading the fine print. Often the cut-off age is 71, but she’s had several clients beyond that age learn that they’ve been paying premiums for years without knowing they wouldn’t qualify for coverage. People with certain medical histories won't qualify either, but they might be unknowingly paying a monthly premium: sometimes the insurance is offered on a trial basis that only stops when you call to cancel it.

Uncollectible debt

If there’s no money in the estate to pay off debt and the debt is in the name of the deceased person only, the credit grantor will have to write off the debt as uncollectible. You may need to provide the creditor with documents proving there’s no estate and no way to pay the debt.

Be careful about making any payments on a deceased person’s debt. If you do, a case could be made that you’ve accepted responsibility for the debt, Johnson explains. Then it could be all yours.