The death of a spouse can be both emotionally and financially devastating. It can also affect your ability to complete your Chapter 13 repayment plan. If your spouse dies during Chapter 13 and you want to finish your bankruptcy, your options include:
Keep in mind that not all of these options are available in every case. In this article, you'll learn how qualification requirements can change after losing a spouse.
Your case won't be dismissed automatically if your spouse dies. However, the bankruptcy court must believe your Chapter 13 case is still feasible and in the best interest of all parties.
If you still have the ability to make your monthly payments and complete your plan, it's likely that the court will allow you to continue making payments as if nothing has changed and you'll obtain a discharge. This scenario is possible if:
If you receive an inheritance, you'll turn the inheritance over to the Chapter 13 trustee for the purpose of paying creditors. If the inheritance was significant enough to render you no longer bankrupt, it might make more sense to dismiss your case and pay any remaining debt balances out of the proceeds. Find out more about receiving an inheritance during a Chapter 13 case.
If you relied on your deceased spouse's income for your monthly plan payments, but you can no longer meet the payment, you might be able to file a motion to modify your plan and reduce your amount. However, lowering the payment might not be possible.
The rule that requires you to pay certain debts in full could prevent the court from lowering your payment. For instance, here are some common debts you must pay in your plan (more exist):
If the entire repayment plan payment goes toward secured and priority debt, you have a "zero-percent" plan and you won't be able to reduce your payment.
By contrast, the court can reduce the amount paid to nonpriority unsecured debt. Examples of nonpriority unsecured debt include credit card balances, medical bills, and personal loans. Your available disposable income will determine the amount of reduction.
Example 1. Jake loses his husband Sai during their Chapter 13 case. Each month, they paid $200 for home arrearages (a secured debt) and $250 for tax arrearages (a priority debt) into their zero-percent plan. Because the plan doesn't pay anything toward nonpriority unsecured debt, the court can't reduce the monthly repayment plan payment.
Example 2. Tiffany loses her husband Jordan before they complete their Chapter 13 case. Each month the 30% plan paid $200 for tax arrearages (priority debt) and $300 for credit card debt, (nonpriority unsecured debt). Tiffany has the potential of reducing her plan payment by up to $300 per month, depending on the amount of disposable income she has available to pay creditors.
Learn more about calculating a Chapter 13 repayment plan.
If you can't afford your Chapter 13 payment, you might be able to convert your bankruptcy to a Chapter 7 case. Whether you have to pass the means test to qualify for a Chapter 7 bankruptcy will depend on the rules in your jurisdiction. However, you must still show that your financial circumstances changed in such a way that you can no longer afford to be in a Chapter 13 bankruptcy.
But keep in mind that nonexempt assets—assets you can't protect with a bankruptcy exemption—can be sold by the Chapter 7 trustee to pay back unsecured creditors. As a result, if you own a lot of property you can't protect, it might not be in your best interest to convert your case. Instead, it could be better to ask the court to dismiss your case and repay remaining balances outside of bankruptcy.
To learn more, see Converting a Bankruptcy Case from Chapter 13 to Chapter 7.
If your spouse dies and you can no longer afford to be in Chapter 13 bankruptcy, you might qualify for a hardship discharge if:
A hardship discharge isn't much different than converting to a Chapter 7 with one important exception—you'll keep the nonexempt property.
Here's how it works.
If you can prove to the court that you already paid creditors an amount equal to the value of your nonexempt assets (the amount they'd get if the Chapter 7 trustee sold your nonexempt property) and the other requirements above, you'll qualify for a hardship. You'll be able to discharge the remainder of your qualifying debt and keep your property.
Example. Ross and Keira had $80,000 in credit card debt and couldn't keep up with the payments. Because of their high combined income, they didn't qualify for Chapter 7 and filed for Chapter 13. When they filed, they had a nonexempt boat worth $15,000 and were required to repay $45,000 to creditors over five years. After 28 months, Ross lost Keira in a tragic accident and he can't make the monthly payment. Because nonpriority, unsecured creditors had already received $21,000 ($750 x 28 = $21,000), more than what creditors would have received in Chapter 7 ($15,000 for the nonexempt boat), he successfully petitioned the court for a hardship discharge.
For more information, see The Chapter 13 Hardship Discharge.