What To Do If Your Loved One Dies During Bankruptcy Proceedings

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What To Do If Your Loved One Dies During Bankruptcy Proceedings

20 November 2014
 Categories: Law, Articles

Bankruptcy is designed to help people struggling with financial difficulties obtain a fresh start. Though it doesn't occur often, sometimes petitioners pass away before the bankruptcy proceedings can be concluded. This can have unfortunate consequences for heirs if they don't take action as soon as possible. Here is what you need to do if your loved one dies during active bankruptcy proceedings.

Chapter 7 or Chapter 13

The options available to you for resolving your loved one's open bankruptcy depends on whether the person filed a chapter 7 or chapter 13 bankruptcy.

A chapter 7 bankruptcy is simply a liquidation of assets and a distribution of funds to creditors. The petitioner's presence is not required for the court to do this. Therefore, the bankruptcy will usually proceed as normal even though the person who filed the petition is deceased.

If the person was married but his or her spouse was not included as a co-debtor, the surviving spouse will be allowed to stand in the person's stead and speak on his or her behalf. For example, you will be allowed to attend the meeting of creditors and testify about your loved one's state of finances. Once you obtain a bankruptcy discharge, you can continue administrating the person's estate like normal.

Things are not as simple, though, in chapter 13 bankruptcy cases because these proceedings require petitioners to make monthly payments to trustees. A deceased petitioner cannot make payments, which can lead to the case being dismissed by the court. Without a bankruptcy discharge, the debts will be considered still owing and creditors will attempt to collect from the estate and heirs.

How to Proceed with the Chapter 13 Case

There are a few things you can do to resolve a chapter 13 bankruptcy case where the debtor has died. The first option is to let the court dismiss the case. As noted previously, creditors can then attempt to collect from the estate. However, if the person is truly indigent with no money or assets, then the outcome is likely to be the same as if the person had filed a chapter 7.

The other option is to request the court convert the case to a chapter 7 bankruptcy. This may be the best option for spouses who were also involved in the bankruptcy proceedings. If the deceased person was the primary breadwinner, the loss of income may be enough to convince the court to make the change.

Even if you're not a co-petitioner, you may still be able to get a chapter 13 bankruptcy switched to a chapter 7, but this option is not available in every state. You will need to consult with a bankruptcy attorney for information about and assistance with pursuing this option in your area.

A third option is to petition the court to discharge the debts anyway based on hardship created by the debtor's death. To qualify for a hardship discharge, the case must meet three provisions:

  • The repayment plan cannot be modified
  • The debtor is unable to continue making payments because of circumstances beyond the person's control
  • Creditors received payments totaling the amount they would have received had the debtor filed for chapter 7 bankruptcy

If the court grants the request, all debts will be discharged, including debts that wouldn't normally be eligible for discharge such as student loans.

A last option courts will only consider if it's in the best interests of the estate and the survivors is to allow the case to proceed as normal. This means the person's estate will need to continue making payments to the trustee as if the individual were still alive. This is another complex alternative that may require the assistance of an attorney to pursue.

Although dealing with the court may be the last thing you want to do after your loved one has passed away, it's essential you make contact with the trustee to resolve the issue as soon as possible. If you're having difficulty proceeding or need help settling problems that crop up, contact a bankruptcy attorney for assistance. Click here to find out more.