What happens if a person files bankruptcy but dies before receiving their discharge? When a person dies, their heirs generally are not responsible for paying the decedents debts. Rather, the debts are paid out of the decedents estate and anything leftover can be distributed through state probate proceedings.
Potential heirs often wonder what happens to the bankruptcy case and if it can be completed to discharge the deceased debts and leave them a larger share. Today’s post discusses what can happen when a debtor passes away during bankruptcy.
When a Chapter 7 Bankruptcy Debtor Dies
If the debtor of a Chapter 7 bankruptcy dies, the attorney will file a “notice of suggestion of death” and the case will generally continue as if the debtor was alive. If the 341 meeting of creditors has been held and concluded, the case will proceed as usual. If the 341 meeting has not been held or concluded, the debtor’s personal representative is authorized to appear on their behalf. The attorney will also ask the court to waive the post-filing financial management course if it has not been completed. The debtor’s pre-bankruptcy debts will be discharged in the bankruptcy and the debtors exempt assets and after-acquired assets are passed to the debtor’s probate estate.
When a Chapter 13 Bankruptcy Debtor Dies
Under Chapter 13, the debtor’s personal representative can elect to dismiss the case or if it is possible, continue the administration of the case. The attorney can file a “motion for hardship discharge” stating that the personal representative authorizes the motion, the motion is in the best interest of the parties, and request waiver of the financial management court if necessary. If the court grants the hardship discharge, it will have the same discharge effect as if the debtor made all their plan payments. The remaining property will be passed to the debtor’s probate estate.
If the court does not grant the discharge, the heirs will speak with the bankruptcy attorney to determine if the case can be continued. This depends on several factors, such as the type of property the deceased was trying to protect, how much longer plan payments will last, and how much the heirs can afford to pay the secured creditors.
In some cases a probate estate will need to be opened in the state court and an executor appointed in order to continue the case. The decedents probate estate steps into their shoes and can make decisions about the case.
If the Bankruptcy is Filed Jointly and One Spouse Dies
If only one spouse dies during the Chapter 13, the surviving spouse has several options. The surviving spouse could ask the court to lower the plan payments because most likely there will be a loss of income. The surviving spouse could also ask the court to split the case into two separate cases. For the deceased spouse case: the case could be converted to a Chapter 7 or the attorney will request a hardship discharge as discussed above. For the surviving spouse’s case: they could continue on their own Chapter 13, convert to Chapter 7, or dismiss entirely. The options are complicated, and the choice will be made based on the types of debt each spouse had and whether or not the surviving spouse wants to continue the case.
There are lots of options when it comes to handling death during a bankruptcy case. You will want to speak with the bankruptcy attorney handling the case to figure out the best way to proceed. If you have any questions about bankruptcy please feel free to contact our office and one of our bankruptcy attorneys will be happy to visit with you.