Can You Put a Deceased Person's Estate Into Bankruptcy in BC?

When a person dies owing more than the estate holds, the executor may wonder whether the estate can go through bankruptcy. The Bankruptcy and Insolvency Act (BIA) is federal law, and it applies in British Columbia alongside the provincial Wills, Estates and Succession Act (WESA).

This article explains who can start the process, how payment works once it begins, and the trade-offs to weigh. Whether bankruptcy is worthwhile depends on the size and makeup of the debts, so a lawyer's advice is wise before you take a step.

This article covers the law of British Columbia.

When an estate is insolvent

The BIA defines an insolvent person as someone who is not bankrupt, who resides, carries on business or has property in Canada, and whose provable liabilities amount to one thousand dollars, and who meets any one of three tests:

• They are unable to meet obligations as they generally become due.
• They have ceased paying current obligations in the ordinary course.
• Their property is not, at a fair valuation, sufficient to pay all obligations due and accruing due.

Meeting any one of these tests is enough, so a shortfall in the assets is not the only sign. How the tests apply to a particular estate depends on the situation, so it is worth confirming with a lawyer or accountant.

Who can start the process

Under BIA s. 49(1), an insolvent person or, if deceased, the executor or administrator of their estate, with the leave of the court, may make an assignment of all the insolvent person's property for the general benefit of creditors. The assignment takes effect when filed with the official receiver. So the confirmed route for an executor is an assignment, and it needs the court's leave.

Creditors have their own route. Under BIA s. 43(1), one or more creditors may file in court an application for a bankruptcy order if the debts owing to them amount to one thousand dollars and the debtor committed an act of bankruptcy within the six months before filing. If the debtor dies after that application is filed, the proceedings continue as if the debtor were alive, unless the court otherwise orders.

Whether a creditor can start a bankruptcy application against someone who has already died is a point to confirm with a lawyer, as the provisions above deal only with death after filing.

How payment works in a bankruptcy

The order below applies to a distribution in a bankruptcy. How it applies to an executor's assignment is worth confirming with a lawyer. In a bankruptcy distribution, BIA s. 136(1) pays subject to the rights of secured creditors, and the order then runs as follows:

Crown priorities, including some tax claims, have changed over time, so check the current form of s. 136 rather than assume how tax is ranked.

Is it worthwhile?

Bankruptcy gives a structured, supervised process, and it replaces the guesswork of choosing which creditor to pay. But it brings its own costs, because administration costs, including the trustee's fees and legal costs, are paid ahead of most ordinary creditors. If the estate is very small, those costs could use up much of what is left.

Consider the alternatives and facts that affect the answer:

• Outside bankruptcy, the executor must settle debts before distributing to beneficiaries. If a will-maker's estate cannot satisfy all debts and gifts, WESA s. 50 reduces assets in a set order: property charged with a debt or left on trust to pay it, then residue, then general, demonstrative and pecuniary legacies, then specific legacies, then property under a general power of appointment. That order yields to a contrary intention in the will, and land the will-maker charged with debts or pecuniary gifts is primarily liable for them.
• A notice to creditors in the Gazette sets a claims period of at least 30 days, and after it ends the executor is not liable for claims not presented in time. However, the notice does not prejudice a creditor's right to recover estate assets from whoever received them, so a creditor who missed the deadline may still pursue the recipients of distributed assets.
• Some assets sit outside the estate. A benefit payable to a valid designated beneficiary under a Part 5 benefit plan, such as an RRSP, is not part of the estate or subject to creditors' claims.
• The executor can be personally liable if property is distributed without a CRA clearance certificate while tax is owing.

What to do next

• List every asset and debt, and note which debts are secured.
• Before distributing anything to beneficiaries, remember that debts must be settled first, and ask a lawyer how that applies if the estate may be insolvent.
• Keep funeral invoices and records of estate expenses.
• Check for plan benefits with a named beneficiary, because those may sit outside the estate.
• Ask a lawyer whether an assignment with leave of the court makes sense, and how the court's leave is sought.
• If you are a creditor, get advice before filing an application, because of the six-month and one thousand dollar conditions.

Frequently asked questions