The loss of life is tragic for family members and on rare occasions loss of life may occur during a bankruptcy proceeding. If you are a successor-in-interest to a decedent’s estate that is in a bankruptcy proceeding, then you will need to be aware of what happens to debts when the debtor unfortunately passes away. While debts owed by the decedent may not automatically pass onto a successor-in-interest, it is important to be aware that creditors may seek assets from the decedent’s estate to sell and satisfy claims.
Federal Rules of Bankruptcy Procedure 1016, titled Death or Incompetency of Debtor, provides:
Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered, and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer's debt adjustment, or individual's debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.
Fed. R. Bankr. P. 1016
Death During a Chapter 7 Bankruptcy Proceeding
In a Chapter 7 bankruptcy case, the untimely death of a debtor generally does affect the bankruptcy proceedings. Chapter 7 bankruptcy is a liquidation proceeding and the Chapter 7 trustee will continue to administer the bankruptcy estate to satisfy creditor claims as if the death never occurred. The bankruptcy court will discharge the debtor’s debts in the same matters as if the debtor was alive. This is significant to a successor-in-interest because the debtor’s creditors will be unable to assert claims against the decedent’s estate.
Death During a Chapter 13 Bankruptcy Proceeding
In Chapter 13 bankruptcy proceedings, a debtor’s death is much more complicated. In Chapter 13 bankruptcy, a debtor is required to pay his or her disposable income or non-exempt equity in assets in a repayment plan that lasts between three to five years. Through the plan of reorganization, the Chapter 13 trustee repays the debtor’s creditors.
Since the debtor has a much larger role in the administration of the bankruptcy estate, the case does not automatically continue following a debtor’s death. The bankruptcy court may dismiss the case if it appears that case cannot continue. Alternately, the debtor’s heirs may continue the decedent’s case and make payments on behalf of the deceased debtor.
The most likely scenarios in which a debtor’s successor-in-interest will continue a Chapter 13 bankruptcy case is if the heirs wish to retain secured property. If the deceased debtor filed for bankruptcy to save a property from foreclosure, then the heirs may wish would continue the bankruptcy. The heirs may also continue with a bankruptcy to take advantage of treatment of secured claims such as lien cramdowns and lien avoidance.
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Bankruptcy Hardship Discharge
A successor-in-interest may also request from the bankruptcy court a hardship discharge. A hardship discharge is a discharge that can be granted by the court prior to completion of the Chapter 13 repayment plan. The survivors can petition the court for a hardship discharge due to the debtor’s death. Upon entry of the hardship discharge, creditors will be unable to seek payment against the decedent’s estate, unless the debt has been declared non-dischargeable.
If you are considering filing bankruptcy, please call our firm for a free consultation to discuss your options.