Friday, June 18, 2010

What happens with a bankrupt estate?


First of all, it's important to realize that there is a difference between an insolvent estate and a bankrupt estate. An insolvent estate, which is much more likely, simply does not have enough assets to pay all of the debts. A bankrupt estate has actually declared bankruptcy.

When talking about either insolvent or bankrupt estates, I often hear people comment that nobody needs to do anything about it because obviously there are no assets. But that's not necessarily true. A deceased person could have a half-million dollar home and another half-million in investments, but if he or she has more than a million dollars in debts and liabilities, there isn't going to be enough money to pay all the creditors. So even though there are assets, the estate is still insolvent. And someone still has to sell that house and cash in those investments on behalf of the deceased person and pay out the proceeds.

That person is the executor named in the Will. If there is no Will, there should be an administrator appointed by the court in the usual way.

Usually in an insolvent estate, the executor will negotiate with the creditors to come to an agreement as to how much each will get. Often everyone agrees to a certain amount "on the dollar" so that they'll each recover at least part of the debt. It's to everyone's advantage not to turn it into a lawsuit, because fighting it out in court means the resources of the estate, which are already not enough, will end up being spent on legal fees and court fees.

If after an executor starts working on the insolvent estate, it is petitioned into bankruptcy by the creditors or the executor declares that the estate is bankrupt, the executor will have to step out of the picture. The control of the assets and debts will be handed over to the Trustee in Bankruptcy to deal with. The executor's claim for compensation can be added to the other claims against the estate.

3 comments:

  1. Thank you for sharing this info, so just to be clear a insolvent estate for example is like a building that is built or being built but runs out of funds to pay debt, and bankruptcy is simply just bankruptcy. I'm trying to gain all the bankruptcy in Edmonton information I can before I make a financial decision.

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  2. my brother in law owned a rather large antique business in Ontario which took in a great number of consignments, apparently there is a large amount owning to consignees that we cannot find a paper trail etc. we are concerned that these individuals might bring a law suit against the company and the owner of the limited company ? can a limited company owned by a deceased individual declare bankruptcy or be insolvent if there are funds owing to individuals. some of these agreements were made quite a few years ago and we cannot find paperwork, just verbal statements that the company did not pay. how does one get a forensic audit performed, would it be advised . will the accountant or the lawyer be able to answer this question for us? thank you Lynn for your timely advice

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  3. What if the deceased was in bankruptcy at the time of death? I am executing my father's estate, and he had declared bankruptcy just over a year before his death (or rather, I had using his power of attorney as he was insolvent and not competent to handle his affairs). The very small amount of money in his estate is not sufficient to cover the bankruptcy and his outstanding tax debt.

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