Deceased bankrupts (dead people can go bankrupt)

February 8, 2018

Yes, dead people can go bankrupt. A deceased person may be assigned into bankruptcy either by the estate executor/trustee with the blessing of the court or by a creditor petitioning the estate into bankruptcy. Of course, another scenario is that a person might die after filing an assignment into bankruptcy.

Section 136 of the Bankruptcy & Insolvency Act places a deceased bankrupt’s estate in a higher position than the licensed insolvency trustee in terms of the distribution of funds. Section 136 allows the deceased bankrupt’s reasonable funeral and testamentary expenses to paid prior to the trustee’s fees.

The caveat being that at least one court (Ontario) has interpreted the term “deceased bankrupt” to mean a dead person who has become bankrupt as opposed to a bankrupt who has died. According to this interpretation, when a person dies may be material in determining whether the funeral and testamentary expenses, which can include estate legal fees, will be paid in priority to the trustee’s fees.

It seems that if you have a choice it may preferable to die before going bankrupt to ensure that your funeral expenses are paid both before the trustee’s fees and before the creditors will receive a share of your estate. In the alternative, following this court’s interpretation, it may be the case that the proceeds of your estate be divided between trustee fees and creditor dividends leaving nothing to cover the funeral costs.