What Happens If An Estate Has More Debts Than Assets?

What happens if the estate trustees find out that the estate doesn't have sufficient assets to pay its creditors? Who gets paid first?

Estate trustees of an insolvent estate have an obligation to determine the priority of payment. If they pay the wrong creditor first, they could be personally liable. An estate trustee must also determine whether to administer the estate as an insolvent estate or to put the estate into bankruptcy.

If the estate is administered as insolvent, the priority of payment is:

1. reasonable and necessary funeral expenses;

2. testamentary expenses and costs to administer the estate which includes payment of compensation to the trustees and payment of legal fees;

3. payment of all other debts proportionally including payment of provincial Crown debts. It is important that debt payment is proportional. A trustee may not prefer one creditor to another.

If the trustee decides to place the estate in bankruptcy, the priority of payment is governed by the Bankruptcy and Insolvency Act, which allows for payment of:

1. reasonable funeral expenses and testamentary expenses;

2. costs of administering the estate including payment of compensation to trustees and payment of legal fees

3. payment of any wages or commission.

4. proportional payment of creditors.

The most significant difference is if the estate is placed in bankruptcy debts owed to the federal Crown, which includes income tax debt, does not have priority but is treated like any secured creditor.

The Lesson: As stated, an estate trustee can be personally liable for payments made that prefer one creditor over another. As such, it is prudent to seek legal advice when dealing with an insolvent estate.

The content and the opinions expressed here is informational purposes only and does not constitute legal or professional advice. Nor does reading or commenting on it create a lawyer/client relationship with the author. I encourage you to contact me directly at adrianlawoffice@gmail.com if you have specific legal questions or concerns.

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