Resolving Estate Debts

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To "resolve" a debt means to pay it off or otherwise deal with it so that the estate no longer owes anything for it. To be completely safe, you should resolve all debts before distributing any assets to heirs (although in practice, you may not need to follow this strictly if the estate is clearly worth more than it owes).

Debt Validation

First, note that if debt is very old (normally 2 to 6 years, depending on province), or a creditor fails to contact the estate within the provincial regulatory deadline period (typically 1-6 months after publication of a probate notice), the debt is barred and the estate has no legal obligation to pay the debt. See Statute of Limitations and Claims Deadlines.

Also note that not all apparent debts are valid. You may be contacted by unscrupulous parties seeking to defraud the estate, or even just organizations with flawed record-keeping. You should be careful to make sure the decedent did actually owe the money, and that he or she didn't already pay it.

Family Entitlements

Although debt resolution generally has priority over distributions to heirs, there are some province-specific exceptions which protect a surviving spouse and children (see Family Entitlements). When considering how and whether the estate can pay all its debts, be sure to first subtract any such priority entitlements from the estate.

Debt Payment

Eventually, the estate will have to pay all its valid debts ... unless the estate owes more than it is worth, in which case not everyone will get back all the money owed.

It may be necessary to sell certain assets in order to raise cash so that these debts can be paid. Try to avoid selling assets the will specifically bequeaths to certain heirs, and in fact, it makes sense to have a plan for what you are doing with ALL the assets before you start selling off some here and there. Of course, if it's just selling a few shares of stock or other basically liquid assets, it's not a big deal.

Aside from the big debts, there will also almost certainly be some debts it's best just to pay as they come due, such as the electric bill.

See Pay Off Debt for instructions on recording any debt payments within EstateExec.

Executor Liability

Be aware that an executor may be personally liable to pay any unresolved debts or tax liabilities of the decedent or the estate if the estate is unable to pay because the executor prematurely distributed estate assets to heirs ... even if the executor was unaware of the debt or tax liability at the time. See Income Tax Act, RSC 1985, c 1 (5th Supp), s 159 for CRA details concerning tax responsibilities and liabilities.

Insolvent Estates

If the estate owes more than it is worth, it is considered "insolvent".

You should strongly consider seeking legal help to resolve an insolvent estate, since there are a number of legal statutes governing who should be paid and how much. Details vary by province, but in general an estate must pay debts in the following order of priority:

  1. Funeral expenses
  2. Estate administration costs
  3. Taxes
  4. Other general debts

Only after arranging to resolve all debts, can you distribute assets to heirs (see Family Entitlements for limited exceptions).

Keep in mind the Statute of Limitations and Claims Deadlines, as mentioned above, to be sure the estate is indeed obligated to pay a given claim, and note that when an estate is insolvent (or near-insolvent), negotiation for debt forgiveness is very common.

Debt Forgiveness

It's common for some debts to be completely or partially forgiven after death, especially if the creditor believes that the estate may not have enough money to pay all debts, and that if the creditor doesn't agree to forgive some of the debt, the other creditors will be paid first and there may not be enough money left at the end to pay to anything to the creditor at all.

When some or all of a debt is "forgiven", that means that the person to whom the money was owed has agreed to reduce the size of the debt. You should get any such agreements in writing. While such reductions in principal are taxable events for corporations, they are not taxable for individuals (as long as the original debt was not intended to fund a profession or business).

Of course, few creditors are going to volunteer to forgive their amounts; you will need to negotiate with them if you wish to get anything reduced. If you have hired a probate lawyer, this may be something you delegate to them, since they're used to it.

See Forgive Debt for instructions on using EstateExec to record any debts forgiven.

Debts TO the Estate

If the decedent (or later the estate itself) has loaned money to other parties, those loans are considered assets of the estate. The normal role of the executor is to attempt to obtain repayment for those loans so that the funds can be distributed to the heirs. It may sometimes be preferable to attempt to transfer the debt arrangement to one or more heirs as part of the inheritance process, in case collection at the moment is not practical. And if the debt appears uncollectible, you may end up having to writing it off (see Asset Disposal for instructions on recording such a decision within EstateExec).

See also Heir Debts.

Ongoing Bills

Not every financial obligation of the estate is an "official" debt, and there are certain informal obligations that continue to accrue during the settlement process, such as insurance premiums, property maintenance, utility bills, and so forth.

While it may make sense to wait to pay most debts until the executor has a clear picture of overall estate finances, the executor also has an obligation to protect the assets of the estate, and failing to pay some of these bills in a timely manner may result in unwarranted harm to the estate. For example, failing to pay a utility bill may result in frozen pipes bursting, failing to make a mortgage payment may result in foreclosure, failing to pay insurance premiums may be problematic in the case of theft or fire, etc. The executor should use common sense about the overall situation, and within the confines of the law, act in the best interest of the overall estate.

See also Taking Inventory and Finding Debts.

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