How does an executor handle an insolvent estate in Ontario?

An estate is insolvent when its debts exceed its assets. When this happens, beneficiaries receive nothing, and the executor's job is to wind down the estate and distribute what little exists in the legally required order of priority.

In Ontario, the priority order for an insolvent estate generally places secured creditors first (they claim against the specific asset securing the debt), followed by preferred creditors (such as wages owed to employees), and then unsecured creditors, who share rateably in whatever remains. Some federal laws governing bankruptcy and insolvency may also apply if the estate is being dealt with under formal insolvency proceedings.

An executor facing insolvency should act cautiously and consult a lawyer before making any payments. Paying one creditor in full while others go unpaid — when the estate cannot cover all debts — can result in liability to the unpaid creditors. The executor should not pay beneficiaries anything unless all creditors have been satisfied in full. The executor is not personally responsible for unpaid debts, as long as they follow the proper priority order.