Dealing with Creditors of an Estate

One of the first things on the minds of many potential executors or administrators of an estate (also known as the “personal representative” of the estate) is what to do about creditors. People often die with, for example, a mortgage or credit card debt. As we discussed last month, the initial duties of a personal representative include notifying all financial institutions; a creditor like a credit card company should have been notified of the death by the personal representative relatively soon after the deceased’s death. Once notified of the death, a large institutional creditor will usually understand that most debts of the deceased likely cannot be paid until a Grant of Probate or Grant of Administration (a “Grant”) has been issued. Such creditors will often be patient and understanding as they are aware that this process can take up to a year.

It is also the personal representative’s duty to make sure that all the deceased’s debts and other financial obligations are paid or otherwise satisfied. Generally, this should be done before making any distribution of assets to beneficiaries and before funding any trusts created under the Will.

A personal representative must behave reasonably and prudently in deciding whether to accept or pay any liabilities or claims against the estate. Consequently, a personal representative is duty-bound to make reasonable and prudent efforts to determine whether creditors’ claims are enforceable and valid. If a personal representative is suspicious that a claim may not be enforceable (for example, due to applicable limitations periods having passed) or that a claim might otherwise be invalid or false, the representative should promptly seek legal advice. Depending on the circumstances, it may be prudent not to pay unless the claim in question is proved in court.

Advertising for Creditors

To help protect the personal representative against personal liability for failing to pay a liability of the estate before making a distribution of estate assets to beneficiaries, a personal representative can place an advertisement in the BC Gazette. This advertisement should state the deceased has passed away, provide an address where the personal representative can be reached, provide a deadline (not less than 30 days from the date of publication) for any creditors to provide details of any claims against the estate to the personal representative, and state that after the specified period the personal representative proposes to distribute the estate, having regard only to the claims of which the personal representative then has notice. This can protect a personal representative from liability for debts that the personal representative is unaware of that come to light after the representative has distributed assets of the estate.

If a personal representative decides not to place an advertisement for creditors of the estate, it is a good idea for the personal representative to obtain indemnification from any future claims from beneficiaries of the estate.

Insolvent Estate Considerations

If there are insufficient assets in an estate to cover all the liabilities, it is insolvent. In such circumstances, a personal representative should consult with a lawyer about that fact promptly, and definitely prior to paying any creditors. In fact, a personal representative who discovers that the estate is insolvent should consider whether administration of the estate would be better undertaken by a licensed trustee in bankruptcy in accordance with the federal Bankruptcy and Insolvency Act, RSC 1985, c B-3. This is because the creditors of an insolvent estate might demand the appointment of a trustee in bankruptcy anyway, and if this occurs, the personal representative would be ousted as administrator of the estate. The personal representative may thus be deprived of the ability to receive a fee for their work and the ability recoup their out of pocket expenses – they would be treated as unsecured debt.

If the personal representative of an insolvent estate decides to proceed with administration, they should obtain the assistance of an insolvency lawyer or accountant before paying creditors. The personal representative of an insolvent estate must pay debts in accordance with the order of priority and manner mandated by Section 170 of the WESA. Failure to do so can result in personal liability for the personal representative and risks the loss of the personal representative’s ability to be paid a fee and recoup out of pocket expenses.

In Conclusion

As we have discussed, a failure by a personal representative of an estate to properly address the debts of the deceased can result in claims against the personal representative by both creditors and beneficiaries. It can also result in a personal representative being unable to claim a fee or be reimbursed for out of pocket expenses. To limit the risk of personal liability and going unpaid, it is critical for a personal representative to be aware of and work within the confines of the applicable legal and regulatory framework.

Join us again next month when we will discuss a related topic – dealing with taxes on behalf of an estate.

. . . .