In last week’s blog we discussed the dilemma that arises when your parent(s) passes away in debt. This week we’ll be addressing your options, what your obligations are, and what you can do for the death of a debtor.
If your parent(s) pass away in debt and there are insufficient assets to pay off the debt, after paying the testamentary costs you really have only 2 options:
- Pay the debts from your own resources
- Let the estate go bankrupt
Emotionally you may want to pay the debts because you believe that it’s the right thing to do. But, before you make a decision you should know that there is no liability for a child to take on the debts of the parent(s). Although there is still a stigma attached to bankruptcy, the reality is that the debts are not yours, so why should you assume this burden and possibly place your own family in financial jeopardy?
Bankrupting the Estate makes financial sense. If your parent(s) pass away in debt you won’t receive a penny until the debts are paid. And, Estates can be complicated, especially if there are existing small business services still active or there are exes or common law spouses involved. It is the responsibility of Estate Executors to pay debts and expenses first. The Executor can side step the minefield of issues involved by bankrupting an insolvent testamentary Estate. If you or another family member is the Executor of your parent(s) Estate, there are some important facts that you should be aware of:
1. The Executors have a personal liability for all acts done, and for all acts not done that they should have.
2. By trying their best, they may be opening up the door for lawsuits from creditors or heirs for matters not properly handled. This is especially true where the family member, who is not skilled at financial, insolvency or testamentary matters, is Executor because he or she has been named, but really has no expertise in this area.
3. By putting the Estate into bankruptcy, which requires prior approval of the Bankruptcy Court, the Executor is relieving him or herself of personal liability because the Estate will now be handled under the Federal statute and all creditors will be handled properly and in priority under the law under the administration of the trustee in bankruptcy.
4. The Executor will relieve him or herself of dealing with creditor collection calls.
5. Section 136. (1)(a) of the Bankruptcy and Insolvency Act (Canada) states:
136. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:
(a) in the case of a deceased bankrupt, the reasonable funeral and testamentary expenses incurred by the legal representative or, in the Province of Quebec, the successors or heirs of the deceased bankrupt;…
If your parent(s) pass away in debt, contact Ira Smith Trustee & Receiver Inc. as soon as possible. We will evaluate your situation and provide you with sound financial advice on how best to proceed Starting Over, Starting Now.
I recently met with a widow whose husband passed away deep in debt. Her late husband was very secretive about his finances and his widow only learned of how dire their position was when she became the executrix of his estate. After fending off collection calls relating to the estate, she learned she was liable for some of his debts. Why? Because her husband had applied for joint credit cards on his accounts, in his wife’s name. Needless to say, this woman, who never used the credit cards, was horrified to learn that she was now a senior with credit card debt rendering her insolvent.
