Death of a loved one is hard on everyone in the family. And it does not get any easier if the deceased has surviving debts. While those debts do not necessarily become the responsibility of the family, creditors may seek other assets from the debtor in attempts to satisfy what is owed. To best prepare for this situation and protect your inheritances, our lawyers will help advise you on what happens if a debtor dies after filing for bankruptcy.
How Death Affects Debts
Bankruptcy does not get dismissed automatically after a debtor dies, nor do those debts fall completely on the heirs. Instead, how the bankruptcy is handled will depend on whether the case is Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
In a Chapter 7 Bankruptcy case, the death of a debtor has very little effect on the proceedings. The trustee will be responsible for the liquidation of the debtor’s assets to pay the creditors, and once completed, the bankruptcy is discharged, just as it would be if the debtor were living.
Chapter 13 Bankruptcy
Reversely, Chapter 13 Bankruptcy cases require the debtor to participate in the repayment plan, which in most situations, involve monthly payments over 3-5 years. So if these payments stop once the debtor passes, the surviving family members handling the deceased’s estate must make a decision to continue the payments or petition the court with a different course of action.
What Are Your Options?
In a Chapter 13 bankruptcy, trustees have the following options on how to proceed after a debtor passes:
- Dismiss the Case
The most common resolution is to get the case dismissed. In this option, the deceased will not receive a discharge and their estate will be liable to creditors. This means the loved ones will only receive inheritance of what is left after the debts are considered paid.
- Ask for a Hardship Charge
If the court grants a hardship charge before the completion of all required payments, all dischargeable debts are eliminated and creditors can not seek payment from the estate. In order to be granted this discharge, the court will analyze your financial situation and take into consideration the best interest of the creditors.
- Convert to Chapter 7
If you cannot make or change the monthly payments, you may also consider the option of converting the case to a Chapter 7 Bankruptcy in order to receive a discharge. There are a number of differences between a hardship charge and discharge in a Chapter 7 case; the most critical being that in Chapter 7, the trustee will sell the nonexempt property (property that can’t be protected with a bankruptcy exemption) for the creditors’ benefit.
- Continue Chapter 13
Lastly, you may choose to continue your Chapter 13 payments as is, or through a modified plan if you are unable to meet these payments. You may be able to reduce these payments by proposing a new payment amount. This will require you to provide the court with documentation to prove you are unable to resolve these debts due to the loss of a job, salary decrease, or another changed circumstance.
If you are considering bankruptcy and are concerned for your loved ones, or you are responsible for the estate of someone who has passed during their bankruptcy case, you should know your options.