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Discharge of a deceased bankrupt

By Doug Carroll | May 17 2013 08:03PM

At issue
As one of its main objects, bankruptcy law seeks to provide relief to those who might otherwise face an interminable condition of debt servitude. The bankruptcy process fosters their rehabilitation to again be effective economic contributors.

Under the Bankruptcy and Insolvency Act (BIA), insolvency is the state of being

unable or unwilling to pay one’s debts as they come due. Alternatively it can be measured as having less net realizable assets than one’s current and accruing debts.

Bankruptcy is the legal status of a person who has either him/herself made an assignment, or against whom a bankruptcy order has been issued, following which that person’s assets generally form the bankrupt estate.

Discharge is the step whereby a person is released from the legal status of being a bankrupt.

How then might a discharge be reconciled where a bankrupt estate is that of a deceased person?

Re Simoes, 2011 BCSC 63

In this set of four applications before a registrar sitting in bankruptcy chambers, all of the subject bankrupts were deceased. As the judgment details, the law surrounding discharge of a deceased bankrupt is thin, and therefore the registrar took it upon himself to research the matter in order to provide context for the decisions, and guidance in future matters.

There are three competing interests involved in a discharge application, being those of the bankrupt, the creditors and the public’s faith in the integrity of the system. Rehabilitation of the bankrupt is obviously moot where the bankrupt is deceased. With respect to creditors and the public interest, the personal representative of the deceased could be called upon in appropriate circumstances to make a payment into the bankrupt estate to ascertain a conditional discharge.

In three of the cases before the court, the registrar determined that the respective bankrupt was in substantial compliance with his or her legal obligations, and an absolute discharge was granted. In the fourth case, the trustee had filed an objection, but the registrar could find no evidence that the shortcomings were willful, so ordered a brief one-week suspension before granting the discharge.

Bankruptcy of Lyle Coleman, 2011 MBQB 300

Lyle Coleman died in March, 2009. His daughter was appointed as administrator of the estate in February 2011, and shortly thereafter in March 2011 she obtained leave from the court for an assignment of the estate into bankruptcy.

In support of the present application for discharge, the bankruptcy trustee reported to the court that “all of the assets of the deceased have been liquidated and distributed in conformity with the provisions of the BIA.”

The judge lauded praise upon the daughter for her “commendable behavior” as estate administrator in undertaking the bankruptcy assignment “without any possibility of personal benefit to herself.”

Still, he distinguished the Simoes cases under which the living person made the assignment, as compared to the present estate administrator’s initiation. Further, he emphasized that there is no practical effect of the BIA‘s rehabilitative objective if a bankrupt is deceased.

The judge then declined the discharge based in the main on the possibility that there may be “pay equity benefits, unknown but now valuable fractional mineral rights” and other potential future receipts. Of note, he earlier acknowledged that “the assets and debts could be considered as modest”, with the realized assets having been $17,000 for distribution among eight creditors claiming $23,000.

Practice points:
1- Clearly an estate administrator should tread carefully before making a bankruptcy assignment, lest the result be an open-ended commitment as in Coleman.

2

  • It should be emphasized to a person in the midst of debt problems how important it is to maintain existing life insurance in force. The proceeds could obviously provide direct estate liquidity. As well, where the estate contains assets that have emotional value, a direct insurance beneficiary could nonetheless choose to contribute into an estate to secure a conditional discharge, rather than allow those assets to be liquidated in order to pay out creditor claims.

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