When someone dies, the loss is heavy for family members, friends, and loved ones. Emotions are strong, and everything seems haphazard. However, what’s worse is when, amidst the chaos, there are legal issues to deal with that arrive if a debtor died after declaring Chapter 7 or Chapter 13 bankruptcy.
If you are an heir or successor of your loved one, the chances are that their estate will be passed on to you. However, this only happens if the debt is a joint debt between the deceased and the heir. Once a debtor passes away, creditors will line up to seek the deceased’s assets by selling the estate or getting their hands on anything that will help satisfy the remaining debt. This means that less amount of assets are left for loved ones.
Death and Chapter 7 Bankruptcy
When a debtor passes away during bankruptcy, we assume that the bankruptcy case is automatically closed, and debts are automatically discharged. However, this is not the case. Since the bankruptcy trustee has the responsibility of liquidating assets to pay back creditors, the bankruptcy involved in Chapter 7 bankruptcy does not impact the proceedings.
This means that the process would continue the same way as it would if the debtor was alive. The trustee has to sell off assets to ensure the creditors get paid. However, creditors may still be interested in the debtor’s estate if their debt has not been fully satisfied. This usually comes under bankruptcy discharge, meaning that this bankruptcy wipes out qualifying debt, such as credit card balances, medical bills, and personal loans.
Death and Chapter 13 Bankruptcy
When a debtor is involved in Chapter 13 bankruptcy, his death has more of an impact than if he was involved in Chapter 7 bankruptcy. For someone who partakes in Chapter 13 bankruptcy, his debt is eliminated through a pre-approved repayment plan. If the debtor dies, a trustee or personal representative will overlook the Chapter 13 bankruptcy. A Chapter 13 debtor has to make payments every month to the bankruptcy trustee for a period of three to five years until the repayment plan has been completed. In case he fails to do so, the court will automatically dismiss the case.
In this case, the trustee of the deceased would be presented with the following options:
Dismiss the Case
The most common option is case dismissal. This means that if a debtor passes away during Chapter 13 bankruptcy, the surviving trustees will allow the case to get dismissed so that creditors can take over the deceased’s estate and fulfill their credit.
Request a Hardship Discharge
Before all essential Chapter 13 plan payments have been completed, the court may grant a hardship discharge. In this case, the creditors will receive the same amount as in a Chapter 7 case. The value of the deceased’s property will not be protected with a bankruptcy exemption.
Conversion to Chapter 7 Bankruptcy
Surviving trustees can request the court to convert the case to a Chapter 7 bankruptcy so that they can receive a discharge. While some courts do not allow this, it purely depends on the court and the judge.
Move on with Chapter 13 Bankruptcy
Courts have the authority to proceed and conclude the Chapter 13 bankruptcy, pretending that the debtor has not passed away.
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