What Happens to a Bankruptcy Case in the Event of the Debtor’s Death?

Death is something we simply cannot plan for. But what happens if debtor files for bankruptcy and dies before the discharge? Is the case automatically discharged? Are their heirs affected in any way and how?

The answers to these questions vary depending on whether the debtor filed for Chapter 7 or Chapter 13 bankruptcy. In this article, the leading bankruptcy lawyers in Encinitas explain what happens to a bankruptcy case after a debtor’s untimely death.

Chapter 7

If a debtor dies during a Chapter 7 bankruptcy process, their death does not affect the case. As you already know, in a Chapter 7 bankruptcy a trustee is in charge of selling the debtor’s assets in order to settle the debt. Since the trustee is in charge of the bankruptcy estate, the debtor does not need to be involved in the case.

In the case of the debtor’s death, the trustee can keep selling the assets in order to repay the deceased’s debt. In some cases, a trustee can choose to abandon assets they think are not instrumental in paying off the debt and can do so without the debtor’s consent.

The court discharges the debts as if the debtor were alive. Meanwhile, the trustee is still in charge of the bankruptcy estate. This has many benefits for the debtor’s family, as the creditors cannot make any claims against the estate because the deceased’s debts are discharged.

Chapter 13

In the case of a Chapter 13 bankruptcy, the debtor repays the creditors on a monthly basis as a part of a repayment plan. This repayment plan can take anywhere between three to five years. In Chapter 13 bankruptcy, however, the debtors get to keep their assets.

Unlike with Chapter 7 bankruptcy, the debtor pays a larger role in Chapter 13 bankruptcy cases. In Chapter 13 bankruptcy they have to make the monthly payments from their disposable income. This is why the case does not automatically continue and the court has the power to dismiss it. Additionally, the debtor’s heirs can choose to inherit the repayment plan and continue repaying the debt.

A number of factors will determine whether the debtor’s heirs will continue with the deceased one’s Chapter 13 case. These factors include how long the case will last, the amount of debt, what happens to secured property and whether they can keep it outside of the bankruptcy case.

If the deceased had a mortgage, the lender must make an agreement with the deceased’s heirs to transfer the mortgage to their name. If the deceased filed for Chapter 13 bankruptcy while facing foreclosure, the heirs have to decide whether they want to repay the debt through Chapter 13 bankruptcy and keep the home. The heirs also have the option of refinancing the property and dismissing the bankruptcy case. Finally, they can choose not to keep the house and dismiss the case.

If the debtor had other secured debts their heirs can purchase or refinance, they can dismiss the case and work with the lenders to pay the asset off outside of bankruptcy. The heirs can also continue with the case and claim various benefits like lien avoidance or cramdowns.

Finally, if the deceased debtor had a large amount of unsecured debt, like medical bills or credit cards, their heirs aren’t held accountable. However, they can seek payment from the deceased debtor’s estate. In this case they have to continue the bankruptcy case to secure a larger estate. In case there are no significant assets to inherit, the family can choose to dismiss the case.

Ask the Leading Bankruptcy Lawyers in Encinitas

If you have any questions regarding your bankruptcy case or if you are looking for an experienced attorney to plan for your bankruptcy reach out to Chang & Diamond, APC. For a free initial consultation contact us at (619) 312-4900 or (800) 718-8118.