What happens if you die in debt?

A survey earlier this year by Sun Life Canada found that a sizeable minority – 27.2% of respondents said, “No, it does not matter if I die in debt.”  Shocking, to say the least!   So what happens if you die in debt?

There are three types of creditors: preferred creditors (ie. Canada Revenue Agency), secured creditors (ie. like a financial institution that’s holding your mortgage loan), and general or unsecured creditors (everybody else ie. utility companies, credit cards etc.).  Preferred creditors get paid first, followed by secured creditors and then unsecured creditors.

Under law all of your creditors are paid out of your estate before any of your beneficiaries are paid out.

If there are insufficient assets to pay off all creditors then some would have to absorb a loss.  Let’s say a deceased party has enough to pay off preferred and secured creditors in full, but has only $40,000.00 remaining in the estate to pay off $80,000.00 in general or unsecured creditors.  In such a case general creditors would be settled out on a pro-rata basis at 50 cents on the dollar.  These rules apply whether the deceased party has a will or not.

So does it matter if you die in debt?  It does if your goal is to leave something for your beneficiaries you’ve named in your will or, if it’s one of your life principles to not force your unsecured creditors to take a “haircut” on the amount your leave owing them.