Even though it doesn’t happen often, debtors sometimes die while their Chapter 7 or Chapter 13 bankruptcy case is still pending. So what happens if a debtor dies during his or her bankruptcy? You may be wondering why it matters at all because whatever happens won’t affect the deceased person. However, the debtor’s death still has consequences for his or her survivors. Read on to find out how survivors are affected and what options are available to them.
When people die, their debts are not passed on to their heirs unless it was a joint debt to begin with. However, creditors can still look to the deceased debtor’s estate and property to satisfy the debtor's obligations. This can affect how much property the survivors and heirs of the deceased will receive. So it is important to determine what will happen to the bankruptcy after the debtor’s death.
A bankruptcy does not get automatically dismissed if the debtor dies. Instead, how the bankruptcy proceeds depends on whether it was a Chapter 7 or a Chapter 13 case.
Chapter 7 bankruptcy is usually unaffected by the death of the debtor. This is because Chapter 7 bankruptcies are liquidations and the trustee is the one responsible for making sure creditors get paid. The debtor is not really necessary for administration of the case once it's underway. The trustee will continue to administer the case as if the death never happened, usually resulting in a discharge.
(To learn more about Chapter 7 bankruptcy, see the articles in our Chapter 7 Bankruptcy area.)
Chapter 13 bankruptcy is different because participation of the debtor in the case is necessary. A Chapter 13 debtor has to make monthly payments to the bankruptcy trustee for three to five years before the case is completed. If no payments are being made then the case will get dismissed. Therefore, in a Chapter 13, the survivors or the administrator of the deceased debtor’s estate must decide how to proceed and petition the court for a course of action. The following options are usually available to the survivors; however, the court will take into account the best interests of the parties when deciding what should be done with the case.
(To learn more about Chapter 13 bankruptcy, see our Chapter 13 Bankruptcy topic area.)
This is usually the first and most common option. If the debtor dies during Chapter 13 bankruptcy, the survivors may let the case get dismissed. However, this means that the deceased debtor will not receive a discharge and his or her estate may be liable to any creditors.
A hardship discharge is a discharge that can be granted by the court prior to completion of all required Chapter 13 plan payments. Survivors can petition the court for a hardship discharge due to the debtor’s death. If granted, all dischargeable debts will be wiped out and creditors cannot come after the deceased debtor’s estate. (For more information, see The Chapter 13 Hardship Discharge.)
Similar to a hardship discharge, survivors may ask the court to convert the case to a Chapter 7 in order to receive a discharge. However, some courts do not allow this so whether it will be successful will depend on where the case was filed.
Courts also have discretion to proceed with and conclude the Chapter 13 as if the death had not happened. The court may order this if it is possible and in the best interest of all the parties.
(To learn more about the Chapter 13 repayment plan and converting a case to Chapter 7, see The Chapter 13 Repayment Plan.)