Unsecured Debt

Our last article covered the Personal Representative’s duty to pay secured debts of the deceased.  This article will discuss payment of unsecured debt by the estate.

Unsecured debt is any funds owing by the estate that are not secured by an interest in property.  These types of debt include personal loans, an unsecured line of credit at the bank or debts that arise due to the death of the deceased such as funeral expenses, legal fees or income tax.

The problem is how to determine what order each debt is paid in and what estate assets are used for debt repayment first.  If the estate has sufficient funds in its residue to pay all debts then the Personal Representative can pay all debts regardless of their order.  However, if funds are tight or insufficient then debt repayment priorities and marshalling as provided for in the Estate Administration Act (EAA) come into play.

Marshalling rules tell the Personal Representative which parts of the estate are to be used first to pay off debt.  First, if a debt is secured, it is paid by the asset that was used to secure the debt.  For unsecured debts, the residue of the estate is used first to pay off the debts.  If the residue runs out before all debts are paid, then specific gifts are applied to payment of debt.  Each specific beneficiary pays their proportionate share of the remaining debt (pro rata) from their gift.  A situation may occur in which either the residuary beneficiaries get nothing but the specific beneficiaries receive their gifts or the entire estate is used for debt repayment and no beneficiary receives a gift.

If there are insufficient funds or the Personal Representative thinks that there might be, the EAA sets out which debts are to be paid first (priorities).  Secured debt has the highest priority and is paid out first with the asset used as security.  Unsecured debts have different categories.  Some unsecured debts such as funeral expenses and estate administration expenses including legal fees have a super common law priority and are paid out before any other unsecured debt.  The second category includes all other unsecured debt, for example lines of credit, credit cards, taxes and personal loans.  Within this category, all debt is equal.  If there is not enough assets to payout all debt then each debt is paid proportionately (pro rata) until the assets are exhausted.  This may result in some debts only receiving partial payment.

The Personal Representative is not personally responsible for any of the deceased’s debts unless the Personal Representative distributes the assets and deliberately does not pay the known debts.  In order to avoid this, the Personal Representative must be confident they know all the deceased’s debt and have made all reasonable efforts to clear those debts.

Likewise, a beneficiary is not personally responsible for debts but their gift in the estate may be subject to unpaid estate debts.  A beneficiary may be liable for payment of taxes on a tax-deferred asset they received as a designated beneficiary if the estate doesn’t have sufficient assets to pay the taxes.

Please contact us if you have any questions regarding an estate or you need assistance in obtaining probate.