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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.

37 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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  4. These are all great questions. I came across this blog and notice that the questions are over a year old, but I would still like to provide answers, as it may help others.

    My name is Ira Smith, President of Ira Smith Trustee & Receiver Inc., a Toronto bankruptcy trustee. Our website is www.irasmithinc.com

    Here are the answers:

    1. Tom, you are correct. Another definition is that insolvency is the financial state of not having enough assets, when liquidated, to pay all of your debts. Bankruptcy is the legal state of having declared bankruptcy.

    2. Anonymous 1, there is no point putting the antique company into bankruptcy as the consignment goods are property of the people who put them into consignment, not the antique store company. In bankruptcy, if the rightful owners can prove that it is their respective property, the trustee has to give it to them. For consignment property already sold, and obviously the funds are not available to give to the respective owners of such property, a case could be made that the respective owners have a trust claim against the assets of the company, that is NOT property owned by others. It has to be against the assets owned by the Company. The other argument may be that the Director(s) of the Company are liable for allowing "theft by conversion". In the case of the deceased Director, it may matter if there are assets in the deceased's Estate. If there are no assets in the deceased's Estate, then it probably ends there. A lawyer would have to be consulted.

    3. Anonymous2, you have to differentiate between pre-bankruptcy and post-bankruptcy debts. The post-bankruptcy creditors would have a claim against the assets available at the time of your father's death, as all of his assets (other than for personal exemptions) at the time of his bankruptcy would have been seized by his trustee. But before any third party could make good on their claim, the funeral costs would have to be paid for. If there is no amount remaining, then it all ends there.

    Finally, I am sorry for all of your individual loss. I hope this helps.

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    Replies
    1. Thank you, Ira Smith, for answering those questions. Such questions really do need someone with your expertise to answer them, and I appreciate your help.

      Lynne

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    2. https://plus.google.com/+IraSmithTrusteeReceiverIncVaughan/posts/iZZcXVKtfgo

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  5. This is all helpful, thank you. My best friend lost her 22 yr old son last month in a drowning accident. He has a truck with a loan on it. The truck is registered and insured in AB, they have provided a notarized letter and death certificate to the financial institution.I have asked the bank to pick up the truck as it is a constant reminder that they have lost their son. The bank rep is saying they need proof that there is nothing in the estate or a notarized letter stating that they refuse the estate. I told the rep that AB is a seize and sue province so why do they need that before picking up the truck. I used to work in the Auto finance world and I have never heard of this.

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  6. I think that this is a somewhat related question to the above thread.

    I'm the executor of my father's estate whose assets consist primarily of an assortment of household items (+laptop and TV etc), some generators, and a 10-year old mobile home/trailer. He doesn't on the land or a car and was essentially living off grid. His trailer had some mold/water damage issues in the recent past and I'm guessing probably doesn't have much of a resale value (also given what a buyer would have to do to dislodge it from the lot). He has ~$80k in debt, including what he still owes on the trailer, and maybe a thousand dollars or so in assets.

    Now that I've detailed his assets/liabilities, I'm not sure how to proceed. How should I as executor go about liquidating this mess? Do I have to personally try to sell his old laptop, TV, and trailer as best I can? What should I do if nothing sells (e.g., especially the trailer)? Do I need to get some kind of appraisal on the trailer to confirm it's potential resale value (or lack thereof)?

    Any advice would be greatly appreciated!

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  7. I think it really comes down to who are the beneficiaries under the will. Notwithstanding estate laws, if you are the sole beneficiary, or if the beneficiaries are all family that get along, perhaps you can short circuit things as the assets obviously have minimal value.

    Your main reason for getting appraisals should be to protect yourself against claims from the beneficiaries that you were negligent in the value you obtained for the assets.

    Also, if you get something for the assets now you have the problem of then paying the creditors pro rata. You may be better off with no realization!

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  8. My husband passed away in October of 2015 in Alberta. I am the sole beneficiary and executor of his estate. We own two homes that have reverted to my ownership. My husband had very high debt between lines of credit at a couple of banks and a couple of credit cards all in his name. The value of his estate is basically the $2500 death benefit from Service Canada. I am sick to my stomach due to his large tax bill that he owes. It is thousands and thousands of dollars. Am I legally responsible to pay this as his spouse? Is there any kind of forgiveness law with the CRA in situations like this?

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    Replies
    1. Hi Valerie. First, I would check with your lawyer. I know Alberta has certain laws to protect the family home. However, I don't know if two homes means that one is unprotected.

      If you and your late husband owned the homes jointly, then although under his Will the homes revert to your sole ownership, again, your lawyer can counsel you on whether they transfer without his creditors being able to touch one or both of them, of ir one might be available to your creditors.

      If your husband had a large unpaid tax bill, your lawyer should also do a title search to see if CRA has registered a federal judgment against one or both of the homes.

      Your lawyer will have the answers for you. In general, unless there has been a transfer of property from your late husband to you, while he was both alive and insolvent, you wont' be responsible for any of his tax debt.

      There is no forgiveness when it comes to CRA! Check these things out with your lawyer.
      www.irasmithinc.com

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  9. So happy I found your blog, I would much appreciate your take on my father's recent death

    Dad died without a will or power of attorney. My sister and I have been searching through all of his papers to locate insurances and other pertinent documents.

    As it stands right now we are unable to find any life insurance or record of life insurance premiums being paid, and have confirmed he opted out of the military life insurance plan when changes were made in the early 1980's

    There is the CPP death benefit of $2,500, and trying to find out if he is still eligible for the retired military death benefit. If he is, that will come close to paying the funeral costs.

    What we have found is he has been a hoarder since our mother passed away 3 years ago, and not keeping current with his bills. Mortgage, line of credit, hydro, CRA

    His house is in a terrible mess including a roof in dire need of replacement, and abuse from clutter and 2 large dogs.

    He has credit card debt in excess of $20,000, an equity line of credit on the house owing in the amount of $124,500, joint ownership on another house with a person receiving ODSP. This person has been contributing $250/month, and dad has been contributing $700+ per month to help her out. We have found out the second house (the jointly owned one) was recently put up under power of sale by the private lender. There is $80,000 owing on that property, and it is up for sale for $99,900, also in dire condition. His own house will require in excess of $25,000 to make it inhabitable.

    Dad also had a motor home, and a fairly nice one, but when when the hoarding exceeded the limits of the house, he began storing garbage and clutter in that. In fine condition they sell for $30,000 in very good condition, unfortunately this one has been abused.

    With the properties and vehicles needing extensive repairs to be sellable, the numbers tell us the estate will be insolvent. The question I have is this…

    Are we required by law to become joint estate trustees and settle this mess? Or, and at the risk of sounding cold, what happens if we do nothing?

    Are we legally required to invest our own money, time and effort into closing this estate?

    Lots of confusion, and difficult to locate information about this sort of situation.

    Any insight would be amazing.

    Regards,
    Brian

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    Replies
    1. You are NOT liable for any of his debts unless you co-signed for them. Unless you think you will recover your money I would NOT sink any personal money into anything. You will likely be on the hook for any funeral expenses as you signed for them. The funeral expenses are tops on the list of who gets paid. Check with the military, my dad was retired DND and my mom received a $10,000 payout on his death as a final pension death benefit. If it helps....think of all this as a business transaction and try not to link this to your dad personally !

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  10. Brian, my understanding is:

    1. Those named in a will as executors/trustees have a choice whether or not to accept the role. Check your provincial government website for details as to how situations are handled by the government when trustees refuse the position.

    2. No, but keep in mind that once the appointment is accepted, if there are no funds in the Estate, the money has to come from somewhere. It is a bit like a game we played as kids called "Tag", once you are tagged, your IT.

    You aren't cold, just realistic!

    www.irasmithinc.com

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    Replies
    1. Thanks, Ira, for your usual great information :)

      Brian, I agree with Ira. You are not required to take on the role of executor/trustee. There was no will, so you weren't named, but as his children you are the first in line to apply for letters of administration. However, be careful about how you present your status to the world. Once you become involved by telling insurance companies or banks or creditors that you're looking after the estate, you might not be able to quit or back out without incurring liability for the undone work, unless a judge releases you. Searching through papers and paying the funeral won't compel you to act as estate administrators, but as I said, if you've been telling people that you're administering the estate, you're skating close to the edge.

      Lynne

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    2. Thanks Lynne for your kind words and excellent advice. Have a great weekend.

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    3. Thanks Lynne and Ira, it's comforting to hear that this is not a cold way of thinking.

      Thanks so much for your replies,
      Brian

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  11. Hello,

    I have been reading through the questions and answers with much interest and have a question myself.

    My FIL died in December and similar to Brian's father, he was a hoarder with a large amount of debt and a house in very bad condition. He owes a large amount of money for a mortgage plus another $10,000 of consolidated debt outside of the mortgage. We are trying to clean up the house, but it is a lot of work. It costs roughly $1600/month to keep the house going (between mortgage, property taxes and bills). As the house is in bad condition, I am worried about it not selling. In another twist of fate, my husband's grandfather (his dad's dad) passed away 10 days before his dad and there is some money coming from his estate into the dad's estate. Now, my question is, if in worst case scenario the house doesn't sell and we exhaust the money from the grandfather's estate, is my husband as executor on the hook for paying for the house until it can sell? Or can we declare the estate bankrupt at that point and walk away and leave the bank to deal with it?

    Thank you in advance for your help!

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  13. I am in the latter part of administering the estate of my mom. She was predeceased by my dad by a little less than a year. I had a few questions: The estate is in Nova Scotia.

    1. As she was the sole beneficiary of his estate any new assets are hers, correct ? There was a $4000+ tax refund on his final return.

    2. She bought a brand new car months before she died and financed it through a bank. I am in the process of completing the inventory, seeing as the car is worth less than the loan, is it still considered an asset ?

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  14. Hi,

    My brother passed away and I am the designated beneficiary of his LIRA of ~360,000 and his TFSA of ~25,000. He has a small RRSP of 1,600, bank account of 1,000, a car worth approximately 13,000 and a non-registered Mutual Fund of 51,000...all of this will be part of his estate. He has some bills including VISA and Line of Credit totalling 15,000.

    How I understand it, I will receive the money from the LIRA and TFSA. Will I be responsible for paying his tax liabilities and his debts for his visa and line of credit? His tax return for 2016 will probably have a balance owing CRA for close to 160,000. He will have some money remaining in his estate but will probably be short 100k.

    Do you know what bills are paid first in an estate? VISA, Line of credit, funeral expenses, tax liabilities.

    I appreciate any information you can give me. I want to share this money equally with my children but I don't want to end up with some unexpected bills afterwards.

    Thank you!

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  15. Hi Diane. Generally, testementary costs come out first. Since you are the designated beneficiary of your late brother's LIRA, then that should pass to you directly and bypass his Estate. Funeral costs come out of the Estate first. So what should be in the Estate is the TFSA (unless that is with an insurance company and you are the designated beneficiary on that also), RRSP, bank account, the car and the mutual fund.

    The Estate Executor/trix will have to do the 2016 tax return up to the date of death, and then the final 2016 tax return taking into account the result of the dispositions of the assets. If your estimate of income tax payable is reasonably accurate, there will not be enough funds to cover all the Estate's liabilites.

    At that point, the simplest may be for the Executor/trix to obtain a Court order allowing them to file an assignment in bankruptcy for the Estate and the bankruptcy trustee will then distribute the available funds amongst the creditors with proven claims in accordance with the Bankruptcy and Insolvency Act (Canada).

    Hope this helps.

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  16. Hi there,

    My father passed away in May and I still haven't been able to find a signed will (he was a pack rat). I have a type copy of it but no signatures on this copy. I do have an older copy from the 80's that names my mom (his ex wife) as the executor and is fully signed. The bank said that it would not be valid as it was written before they were divorced and since I don't have a signed copy of the one that names me as the executor it would be valid for them or even to cancel his car insurance. His bank account balance is under $10,000 and there is quite a bit of credit card debt so the estate will be insolvent for sure. The only other family that he had was myself and my sister (in BC). No one wants the job as executor, but I will do it as that is what he wanted. I have two questions, I think what I need is a grant of administration but since he had moved from my home in Ontario to Nova Scotia about 6 months before he passed, can I file for this in Ontario or do I have to do this in Nova Scotia? Or is there a way for her to name me as the executor through a signed letter (she is in Alberta).

    Also, if I get a grant of administration, does it then have to go through probate? The only asset is the cash in a bank account and a used car that he bought for $3,000.

    Thank you in advance for any help!

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  17. My brother recently passed away without a will and no executor or administrator. (ontario) He has a child who is 23. My brother lived with my parents and had no property or assets of value. He may have some outstanding credit card debt, but there is no money to pay out. My parents are paying for the loan on his vehicle, but the ownership is in his name. Any advice as to my next steps? Can the ownership of the vehicle be placed in my parents' name? Is my family responsible for any debts? Do I need to see a lawyer?

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  18. If I understand correctly, the only asset is a car which has a loan registered against it. Continuing to drive the vehicle which is owned by the deceased and insured in the deceased's name is a very dangerous thing to do. Your parents should call up whoever holds the loan and provide them with a copy of the death certificate, advise that no more payments will be coming and they should pick up the car. If someone wishes to purchase the vehicle, they should find out the black book value and see if they can agree on a price to purchase it from the lender.

    As far as the rest of the debts, if no one co-signed or guaranteed them, then no one else is responsible to pay them and the creditors should just be advised of the death and that there is no assets or will and therefore no money.

    Sorry for your loss.

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  19. Ontario is a seize and sue province. If the car holds less value than the loan then the loan holder may seize the car and then sue as an unsecured creditor. There may be other income such as CPP. The loan may be continued but whomever wants to pay it should make that clear to whomever holds the loan. A lender wants the FULL loan paid and may try pressuring other family members into paying. As was mentioned earlier ONLY a cosigner is obligated to pay an outstanding debt. No one else is responsible...if the estate is broke it is broke. Make sure the creditors are aware of the death...it will keep them from hounding your parents as I'm guessing that's the phone number they have.

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  20. I am the estate trustee for my mother in laws estate. Since her passing, I have filed her income tax with Revenue Canada and received a letter of clearance from them. There is no money let in the estate, it is insolvent. However, there are two creditors that are owed approximately $9400. How do I proceed?

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  21. Since you have the clearance certificate from CRA, I would just write to each creditor, in your capacity as Estate Trustee, provide them with a copy of the death certificate, advise them that there are no assets in the Estate and recommend that they close their files as there will not be any payment forthcoming and your are proceeding to wind up the administration.

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  22. It has been over two years since the passing of my best friend. He passed suddenly and no funeral or service was held.i have had no contact during this time. I recently got a call from his brother telling me I am the sole beneficiary of his RRSP and Company pension plan. I am in shock. The Bank says I will need a lawyer to prove there is no living spouse. He had no children. He didn't have a will and may have had some debts but no property or life insurance. Is it possible I will have to pay taxes on the total amount or only on interest for the two+ years since he passed? Can the family come after me to pay his estate taxes and other debts of his. I feel conflicted since I know why he left it to me and not his family.W hat kind of lawyer do I need?

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    Replies
    1. Yes, it is possible that you could pay tax on the whole amount of the RRSP money. If there is not enough in the estate to pay the tax, CRA will look to you for payment.

      No, the family cannot come after you for payment of estate debts. The assets that have been left to you are not in the estate and are therefore not eligible for payment of estate debts or taxes that are not generated by the RRSP.

      I would look for a lawyer with a specialty in wills and estates.

      I really shake my head when someone is asked to prove a negative, such as "there is no spouse". It's easy to prove that someone's spouse died, but not so easy to prove that the person never remarried. The fact that it's a negative means there are no records! You'll end up swearing an affidavit giving what evidence you have.

      Lynne

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    2. Thank you for your response. The bank told me the lawyer would be required to do the search for proof there isn't a spouse. Is there a technical name for such a search and if so could I do it myself and not use a lawyer? Also am I also responsible for the full taxes on his LIF as well as the RSP? Do I have any right to an accounting of his estate to know if the death taxes were paid and if they declared the estate insolvent before deciding to claim the accounts?

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    3. Doesn't sound like you are a beneficiary of the estate, just of the two named accounts so I don't think you could demand an accounting. I agree with Lynn...how do you prove a negative ? I guess you could search marriage records but one can be married anywhere in the world. If it has been two years the bank should accept that there are no other claimants...you are named as the beneficiary and they MUST give you the proceeds. No one else may make a claim on them AFAIK. This is not an estate matter...unless I'm missing something.

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  23. Thanks Paddy. I do intend to ask the bank to clarify what the forms they are preparing actually are for before I hire a lawyer to deal with them.They have been very vague so far. I worry it will get tied up with lawyer$ for month$ and then I may also have to pay the full market value tax of the accounts at date of death, which I understand should have been paid to the CRA with the final tax return (over a year ago) but I suspect it wasn't if it was intestate or bankrupt but no one has permission to tell me this (not the bank nor the CRA). I realize I will pay interest on over two+ years of growth since date of death.

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  24. My father in law recently passed. He owes over $50k to the CRA from previous years but has no assets. Very little money (maybe a few hundred bucks) and no savings. No investments. No property. He owned a car that is still not paid for (about $9k on that loan). So his estate is insolvent.

    Will the CRA write this off? Or go after myself as executor or his children for the money?

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    Replies
    1. The CRA doesn't make people pay debts they don't own.

      As an executor, you would only be personally liable for estate tax debt if you paid beneficiaries or took the estate funds yourself, or did something with estate assets that wasted or misdirected money that could have been used to pay for taxes.

      Whether they write things off or not, I couldn't say. But they won't go after his children if they didn't receive any estate funds.

      Lynne

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    2. Thank you. We'll just keep wading through. Talk about stressful and sad. My husband and sister in law were very worried they'd be made to pay his debt and neither family is in a position too.

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