What Happens When a Nova Scotia Estate Cannot Pay Its Debts

You have started to add things up and the debts look bigger than the assets. As executor, that can feel alarming, especially if you worry the shortfall will land on you or your family.

In general, an executor is not meant to cover an estate's debts from their own pocket. But mistakes in how you pay and distribute can create personal risk. This article explains the steps the rules set out, where the risks are, and when to get advice.

This article covers the law of Nova Scotia.

What an insolvent estate means for you

An estate is insolvent when what the person owed is more than what they left. As personal representative, you are the person who deals with the property and the debts. You also hold land as trustee for the people entitled to it.

The way an estate is valued can make it look healthier or weaker than it feels. For probate purposes, personal property is counted at gross value, and unsecured debts are not deducted from it. Land is counted at fair market value less registered mortgages and encumbrances. So a figure used for probate is not the same as a measure of whether the estate can pay its bills.

How creditors come forward

Advertising in the Royal Gazette is a statutory requirement for every estate opened in Nova Scotia, and the advertisement runs six months. Creditors file a Notice of Claim (Form 32) within that six-month period and serve a copy on you. Form 31 is the request for the Royal Gazette advertisement, and Form 33 is the notice of contested claim.

A creditor who misses the advertising period may claim only with the court's prior consent. If you are not sure whether to accept a claim, Form 33 is the document for contesting one. Disputes you cannot settle are a reason to speak with a lawyer.

Order of payment and your personal risk

When there is not enough to pay everyone, the order in which debts are paid depends on your situation, so it is worth confirming with a lawyer before you pay any one debt. Because the order affects who gets paid and who does not, confirm it before you pay anything beyond the clearly necessary.

The main protection for you is the timing of distribution. If no claim is filed, or assets sufficient to cover the filed claims are kept back, no action lies against you for paying debts and distributing. Distributing earlier risks personal liability for unpaid claims. After 12 months from the grant, or longer if the court allows, claims presented must be paid and distribution made.

There is also protection for what you could not know. If you distribute to people whose claim or address you had no notice of, you are not liable for those proceeds.

• Be cautious about paying beneficiaries while claims may still arrive, because distributing earlier risks personal liability for unpaid claims.
• Keep assets back to cover the claims that have been filed.

Records, commission and closing the estate

You must keep accurate records of all property and debts of the estate. Good records also make it easier to prepare your accounts when the time comes.

You must apply to pass your accounts within 18 months of the grant unless the court orders an extended period, when you are seeking a discharge, or when the court orders it. An interested person who objects to the accounts files a Notice of Objection (Form 42); without one they are treated as consenting.

A commission for your services is set by the court. Beyond actual and necessary expenses, it may not exceed five percent of the amount received. The court may consider the size of the estate, the care and responsibility involved, the time spent, skill and the success of the administration. A fee set out in the will generally replaces the statutory commission unless the executor renounces it within the time limit. How a commission works when an estate cannot cover its debts depends on your situation, so it is worth confirming with a lawyer.

What to do next

• List every asset and every debt you know of, with dates and amounts.
• Make sure the Royal Gazette advertisement has been placed and note when the six-month period ends.
• Keep every Notice of Claim you receive and note when each was served.
• Distributing before the six-month advertising period ends risks personal liability.
• Ask a lawyer or accountant how the debts rank and whether a formal insolvency process makes sense for this estate.
• If you have not yet acted as executor, ask the registrar before taking any step, since renouncing may be treated differently once you have acted.

If there are joint accounts or property, or assets with a named beneficiary, these may pass outside the estate. Whether creditors can reach them depends on the facts, so raise them with your adviser.

Frequently asked questions