Even though it doesn't happen often, debtors sometimes die while a Chapter 7 or Chapter 13 bankruptcy case is still pending. 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. It is still essential to determine what will happen to the bankruptcy after the debtor's death. Why? Creditors can always look to the deceased debtor's estate and property to satisfy the debtor's obligations, which will decrease the amount received by heirs.
Find out more about estates and the probate process.
Bankruptcy doesn't get automatically dismissed if the debtor dies; instead, how the bankruptcy proceeds will depend on whether it is a Chapter 7 or a Chapter 13 case.
Chapter 7 bankruptcy is usually unaffected by the death of the debtor. Called "liquidation" bankruptcy, in Chapter 7, the trustee is the one responsible for selling the property and making sure creditors get paid. The debtor isn't necessary for the administration of the case once it's underway. The trustee will continue to administer the matter as if the death never happened. The result is usually a bankruptcy discharge—the order that wipes out qualifying debt, such as credit card balances, medical bills, and personal loans.
To learn more, see Chapter 7 Bankruptcy.
Chapter 13 bankruptcy is different because the 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 case completion through a repayment plan. The court will dismiss the case if the debtor doesn't make payments.
In Chapter 13, the survivors or the administrator of the deceased debtor's estate must decide how to proceed and ask the court to proceed with that course of action. The following options are usually available to the survivors; however, the court will take into account the best interests of all affected by the case (parties) when deciding what to do. Learn more about Chapter 13 Bankruptcy.
The first and most common option is a case dismissal. If the debtor dies during Chapter 13 bankruptcy, the survivors might let the case get dismissed. The deceased debtor will not receive a discharge, and the estate will likely remain liable to creditors.
The court can grant a hardship discharge before completion of all required Chapter 13 plan payments. However, the unsecured creditors must receive the same amount as in a Chapter 7 case—the value of any property that couldn't be protected with a bankruptcy exemption.
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. See Chapter 13 Hardship Discharge for more information.
Similar to a hardship discharge, survivors can ask the court to convert the case to Chapter 7 to receive a discharge. However, some courts do not allow this. Whether it will be successful will depend on the court in which the case was filed.
Courts also have the discretion to proceed with and conclude the Chapter 13 as if the death had not happened. The court might order this if it is possible and in the best interest of all the parties.
Learn more about the Chapter 13 repayment plan and converting a case to Chapter 7 in The Chapter 13 Repayment Plan.