Let’s face it. Not all of us have financially responsible parents. Though we would like to see them as role models, some of us just have parents that don’t make financially sound decisions. Hey, let’s not blame them for their flaws. No one has ever taught anyone about proper personal financial management. Maybe not until you stumbled upon this or any other financial blog. So what happens if you see your crazy mom racking up credit card debt even though she’s retired? Is dad buying a $100K sports car with very little savings?
One of the greatest fears as the next generation is whether we will become saddled with our parents’ debt. It’s even scarier when we think about how much student debt the current working generation has accumulated over so many years of education. It’s not unquestioned to think that new grads could have accumulated over $50K of their own debt even before starting to work. So how are we supposed to pay off our parents’ mortgage if they are never going to finish paying it off?
Saved By The Estate
Thankfully in Canada, debt that is accumulated by other individuals do not transfer to other parties. Unlike the movies where children are saddled with their parents’ debt and end up going bankrupt, children in Canada are not responsible for paying off the debts of their parents if they pass away.
This means any unpaid credit cards, line of credits and mortgages that are still under your parents’ name don’t get passed to you. Call it a free “get out of jail” card. What ends up happening is that the estate of your parents are responsible for paying any outstanding loans.
When anyone dies in Canada, all possessions are deemed to be sold at current market value. If there is outstanding debt that still needs to be paid off, then the assets will be liquidated and creditors will be reimbursed first. Only after outstanding debt is paid, will the remaining assets be given to the inheritors. That means that if your parents owe more money than they have at the time of their death, then they didn’t love you enough to give you an inheritance. Did you forget Mother’s Day again?
Do Not Co-sign Loans
There are some instances where debt does get passed to another party and that happens when loans are co-signed. By co-signing any kind of loan, it makes you responsible for the debt even if you might not have used the money.
This is very important because you don’t ever want to co-sign loans with your parents. It doesn’t matter if they want to buy a second home under your name to save land transfer taxes, or if they want to co-sign a loan because they have bad credit. Just don’t do it. If you don’t sign your name on anything, then you will not be responsible for the debt.
If you feel really guilty about not helping your parents, then gift them money. Remember that being financially prudent still means to live within your means. Co-signing a loan and helping your parents, no matter how morally right that sounds, is still living beyond your means. If you really want to help out your parents, then decide how your current financial situation can be adjusted to include your parents as dependents.
It Is Not A Free Pass
Now that you know that your parents’ debt will not be left for future generations to deal with doesn’t mean that you should tell your parents to forget about being financially responsible. It doesn’t mean that they can afford a brand new Ferrari or buy a big retirement cottage in Muskoka.
In this YOLO (You Only Live Once) culture we all want to get what we want now because we’re all afraid of dying tomorrow. The real fact of life is that we’re living longer, and thus we should actually try to be financially saavy. Know when to save. Know what to invest in. Know that you can have fun without going bankrupt.
We should learn to live within our means and enjoy the experiences with what we can comfortably afford now rather than mortgaging our future.That also applies to our parents, and grandparents who may all very well live into their upper 80’s and 90’s years of age.