What If an Alberta Estate Has More Debts Than Assets?

Finding that a loved one owed more than the estate holds is stressful. You may wonder who gets paid, whether you have to act at all, and whether the estate must go into bankruptcy.

This article sets out the general Alberta rules. Because the stakes for you personally can be high, it is worth getting legal advice early.

This article covers the law of Alberta.

Who gets paid when assets fall short

Alberta's Estate Administration Act does not itself use the term insolvent estate. Instead, the deficiency-of-assets rule applies. If assets are not enough to satisfy valid money claims, the claims must be paid proportionately and without any preference or priority.

There are exceptions. The rule gives way where another enactment provides otherwise. Existing mortgages are preserved, so secured creditors keep their security, and so is the common-law priority for funeral and estate administration expenses.

How bankruptcy changes the order

Where a federal bankruptcy applies, the Bankruptcy and Insolvency Act scheme of distribution governs. A bankruptcy order is described as one that can force the estate of a deceased person into bankruptcy. When a bankruptcy application is made for a deceased debtor, it must be served on the executor or administrator.

Subject to the rights of secured creditors, the order starts with the reasonable funeral and testamentary expenses incurred by the legal representative. Next come the costs of administration, including the trustee's expenses and fees and legal costs, and then the levy under section 147. After that, the section continues with items such as unpaid wages, municipal taxes, arrears of rent, workers' compensation and Crown claims, with some paragraphs tied to a prescribed date.

All debts and liabilities, present or future, that the bankrupt owed on the day of bankruptcy are deemed provable claims. If creditors are paid in full, any surplus goes to the legal personal representative or heirs of a deceased bankrupt.

Do you have to take the job?

Government guidance refers to a personal representative who chooses to administer an estate. That representative must satisfy the estate's debts if the estate has the funds to do so. Whether and how to step back from the role depends on your situation, so ask a lawyer before you act or decline.

Be aware that creditors can apply to administer the estate themselves to collect a debt. Heirs are not named as debtors, because the claim is against the estate.

Protecting yourself as representative

A personal representative is subject to the liabilities and duties of a trustee, which is the source of personal liability for improper distributions.

• Give notice to claimants following the Surrogate Rules. You may require a claimant to verify the claim and state the value of any security held.
• You may contest a claim in whole or in part. If the claimant does not apply to court within 2 months after notice of the contest, the claim is barred.
• Once notice is properly given, you may distribute having regard only to claims you know of, and you are not liable for claims you did not know of.
• Without a CRA clearance certificate, you are personally liable for unpaid tax amounts, up to the value of assets distributed.

Even after a compliant distribution, a creditor who was not notified can still pursue the person who received the property.

What to do next

• Do not distribute anything to beneficiaries until you understand the debts.
• List all assets, debts, secured claims and any mortgages.
• Pay no single creditor ahead of others without advice, since claims generally share proportionately.
• Consider a clearance certificate from the CRA.
• Get legal advice about notice to creditors and whether a bankruptcy is appropriate.

Frequently asked questions