Some individuals are appointed as Estate Trustees and, after
determining the debts owed by the Estate, discover that the Estate
does not have enough money to pay its creditors leaving the Estate
Trustee to question who should get paid.
There are laws regarding who is entitled to be paid first when
an estate is insolvent (unable to pay all of its debts). An Estate
Trustee of an insolvent estate must decide whether to administer
the estate as an insolvent estate, or to place the estate into
bankruptcy. In either case, the Estate Trustee must determine the
priority of payment, as the failure to pay creditors in the proper
order could result in personal liability to the trustee.
If the estate is administered simply as an insolvent estate, the
order of payment is:
reasonable and necessary funeral
testamentary expenses and costs to
administer the estate (including payment of the compensation for
Estate Trustee and legal fees);
all other debts proportionately,
including provincial Crown debts (it is unclear whether federal
crown debts such as federal income taxes receive a priority over
other creditors in this category).
If the estate is placed into bankruptcy, section 136 of the
Bankruptcy and Insolvency Act dictates the order that debts are to
be paid. As with an insolvent estate, bankrupt estates are required
to pay the reasonable funeral and testamentary expenses first.
Secondly, the costs for administering the estate (including
compensation for the Estate Trustee and legal fees) get paid. Other
specific costs such as wages or commissions owed then can get
The most significant change when paying debts of a bankrupt
estate as opposed to an insolvent estate is that the federal crown
(including federal income tax payments) does not receive any
priority under a bankrupt estate and is treated like any other
unsecured creditor that has no priority.
Given the potential exposure a trustee faces if the order of
payment is not made correctly when dealing with an insolvent
estate, trustees may wish to retain legal counsel to assist
The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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