Insolvent Estates

Suppose that you are named the executor of a friend’s will, and on your friend’s death you discover that he has more debts than assets. What can you do?

The first question you need to ask yourselves is whether you want to accept the responsibility of acting as executor. There are always significant responsibilities involved in acting as executor. The pitfalls are potentially greater when there are creditors who may sue for what they are owed, and insufficient funds to pay them. You may want to consider renouncing your position as executor. You may renounce as long as you have not started to deal with the deceased’s affairs.

If you decide to act as executor, you will not be able to distribute the estate assets to the beneficiaries of your friend’s will; the assets will have to be sold to pay the creditors.

In British Columbia, Part 11 of the Estate Administration Act, R.S.B.C. 1996, c. 122, sets out the priorities of the creditors. Secured creditors come first. For example, if a bank has a mortgage on the deceased’s house, the mortgage will have to be paid off out of the proceeds of the sale of the house before any funds will be available for other creditors.

After secured creditors are paid, you may pay funeral expenses out of the estate. But, the funeral expenses must be reasonable in the circumstances. If you spend a large amount on a lavish funeral leaving other creditors unpaid, you may be required to pay some of the expenses out of your own pocket.

Your fees and expenses for acting as executor are next in line, followed by legal costs. This is important because it means that if there are sufficient assets to pay the secured creditors and funeral expenses, you will be reimbursed for the expenses you reasonably incur and compensated for your time and effort before other creditors are paid.

The Estate Administration Act then sets out a number of other types of debts with priority including unpaid wages, municipal taxes, back rent, workers compensation, employment insurance and income tax withholdings, and other debts to the Crown. There are some limitations to these priorities, and there are some others not mentioned here that are less common.

Those creditors who do not have security and whose claims do not come within one of the priorities, rank equally.

It is important that as the executor you follow the rules setting out who is paid first. If the law requires you to treat two creditors equally you must not favor one over the other. This can be difficult when some creditors behave aggressively hoping to get paid more than their fair share. Aggressive creditors must be firmly told that they cannot jump ahead of those creditors whom the law says are entitled to be paid first. If you do not follow the rules, those creditors who get less than what they are entitled to, could sue you personally for the shortfall.

Before completing the administration of the estate, you may prepare accounts, and ask the creditors to release you from any claim, or you may apply to court for a release. This protects you from future claims.

Instead of administering the estate yourself, you may apply to court for permission to have a trustee in bankruptcy appointed under the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3. The trustee in bankruptcy would then assume responsibility for distributing the assets among the creditors