Death and Bankruptcy
The average person files for bankruptcy receives their debt discharge and moves on with their life. They are happier and financially healthier than ever before and bankruptcy allowed them to get a fresh start in life. But in some rare cases, the person filing for bankruptcy dies before the process is complete. Although death and bankruptcy don’t often occur at the same time, it helps to know what to expect if this happens to someone with whom you have a financial link.
As if often the case, the chapter of bankruptcy affects how death and bankruptcy are handled. Here’s what you should know:
Chapter 7 Bankruptcy and Death
If you’re concerned about what you’ll leave behind for your family if you file for chapter 7 bankruptcy and die before the process is complete, you don’t need to worry. The profits from non-exempt debts satisfy all or a portion of the debt. Then the court discharges any remaining debt. The process is all but identical to what it would be if you were alive to complete it.
However, if you die before the meeting of creditors or the completion of the financial management course, your bankruptcy case will be dismissed, just as it would be if you were alive. The bad news is your heirs will be forced to pay your debt out of your estate and your assets won’t have the protection they’d have if you’d completed filing.
The lesson here?
Move the Chapter 7 bankruptcy process along as quickly as you can, just in case something happens. Even if you are in perfect health and don’t anticipate a problem, the best thing you can do for your loved ones is to do all you can to get your ducks in a row and have the greatest likelihood for the court discharging your debt.
Chapter 13 Bankruptcy and Death
Dying mid-way through completing Chapter 13 bankruptcy is more complicated than it is with Chapter 7.
Chapter 13 bankruptcies establish a repayment plan that typically lasts three to five years. Because the length of time it takes to complete this chapter is significantly longer, there’s a higher likelihood of someone dying mid-way through the process.
Chapter 13 bankruptcy requires a significant long-term commitment from a debtor. If you die before meeting your obligations, your heirs have two options:
- They can request the court dismiss the Chapter 13 case
- They can continue making payments under the existing Chapter 13 arrangement
Which of these options is best varies from case to case. Most of the time, when heirs choose to complete the Chapter 13 arrangement, it’s because it was near the end of the repayment plan. Making payments means they tie up the loose ends of the bankruptcy case and protect the assets in the estate.
It might be easier to close the bankruptcy case of someone who dies before a significant amount of their debts are paid off and the majority of their debt is unsecured. Most unsecured debt isn’t passed on to the heirs of an asset, so there isn’t much incentive to pay them off.
If you’d like to learn more about the differences between these two types of bankruptcy, check out this information.
A Bankruptcy Attorney Can Help You Make Decisions about an Estate Affected by Bankruptcy
It’s tricky handling the estate of a loved one who filed for bankruptcy. You must also protect your family in the event of your death if you file. Every case is different, so you must speak to a bankruptcy attorney who can review your situation and help you make the best decisions.