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What Happens When Someone Dies with Debts?

What Happens When Someone Dies with Debts?

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Posted May 14, 2024

This is often a question that arises when someone dies with debts and the estate trustees  are at a loss as to what to do with such debt.

It is important that the estate trustees are aware of the debts to meet the demands of the creditors out of the estate of the deceased. The estate trustees should also be aware that the bequests are paid after the debts are satisfied.

Debts can take many forms- taxes, secured debts (mortgages, lines of credit) and unsecured debts such as credit cards.

Then there might be another fourth type such as fair and reasonable compensation that one can demand from the estate of a deceased for services rendered. The claimant who looks to be compensated from the estate must look to equity and unjust enrichment in order to be financially compensated from an estate.

The estate trustees, firstly, should determine the type of debt and then examine if there are assets (money) to satisfy those debts. As an estate trustee if you are satisfying the debts of an estate, you need to pay the debt in full and you cannot pay one creditor and not the other. Therefore, it’s important to examine if the estate has sufficient assets to satisfy the debts or if assets can be converted into cash in order to do so.

What if an estate trustee finds that there is no money to pay debts?

An estate trustee must be extremely careful in this situation. If you find that the estate is bankrupt- i.e. there is no money to satisfy the debts – tread very carefully. Do not pay any non-tax creditors before paying taxes; otherwise, you are personally liable for the payment of those taxes. Do not pay one creditor as opposed to another.

If the estate is bankrupt,

  • do not take any steps to administer the estate or hold out that you are the estate trustee;
  • if you have been appointed the estate trustee by a Will, renounce the right to be appointed the estate trustee;
  • assign the estate into bankruptcy.

When an estate is assigned into bankruptcy, the trustee in bankruptcy will administer the estate and pay off debts as much as possible. It would also mean that there might not be anything left for the beneficiaries.

Therefore, if you have been named as an estate trustee, be careful of the debts of the estate and seek professional help before you take on the role.

This blog post was written by Nuwanthi Dias, a member of the Wills and Estates and Estate Litigation teams.   She can be reached at 613-369-0385 or at nuwanthi.dias@mannlawyers.com.

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Nuwanthi Dias

Nuwanthi Dias

I am an associate in the firm’s Wills & Estates and Estate Litigation groups and support clients in all matters related to estate planning, estate administration, and estate litigation. I work with families and individuals of all backgrounds to identify their end-of-life goals and plan for how they will distribute their estates to family, friends, or favourite charities in the most tax efficient way. With nearly 30 years of experience as a lawyer, I have practiced law in Sri Lanka, Toronto and at another Ottawa firm. I was called to the Ontario bar in 2013. My previous experience in areas of incapacity hearings, civil litigation and family law brings a well-rounded perspective to my practice. A member of the Women’s Law Association of Ontario, I have presented professional development seminars for the Law Society of Ontario and have been an active volunteer with Pro Bono Law Ontario for many years.... Read More

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