Can Bankruptcy Survive the Death of the Debtor?

by Stephen Kass on October 4, 2012

There are instances where a debtor files for bankruptcy, and subsequently dies before the bankruptcy case is settled.  The debtor is the one filing for bankruptcy and in need of a fresh start, so it may be assumed that after the debtor’s death the case would be thrown out.

The death of a debtor does not automatically mean his or her case is over.  The Bankruptcy Code permits cases to continue after a debtor’s death in both Chapter 7 and Chapter 13 cases.

Rule 1016 of the Federal Rules of Bankruptcy Procedures governs the rules of death or incompetency during a bankruptcy proceeding.    Rule 1016 permits bankruptcy to continue following the death of a debtor.  The Rule states, “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.”

Similarly, in a Chapter 13 case, bankruptcy can continue after a Debtor’s death if the continuation is in the best interest of the parties.

The debtor is gone, but the continuation of the bankruptcy is significant to those the debtor leaves behind.  If the bankruptcy is permitted to continue, and the debtor’s debt is discharged in a Chapter 7 case, the debtor’s beneficiaries are permitted to take the debtor’s assets without having to account for all the debtor’s debt.

In a Chapter 13 case, the debtor’s heirs may not be able to receive the assets so seamlessly.  In a Chapter 13 case, debt is not necessarily discharged.  Instead, the debtor works with the creditor to create a repayment plan.  The repayment plan tends to be funded by the debtor’s income, and is based on what the debtor can afford after his or her expenditures.  Because the debtor is dead, he or she no longer has income to fund the plan.

It may be possible for a family member to fund the plan if they are willing and able.  A loved one may be particularly willing to fund a plan when the bankruptcy was filed to address a real estate issue or stop a foreclosure.

Whether a bankruptcy continues can be a matter of inheritance laws, which vary from state to state.  It is important to contact an experienced attorney to help determine the best course of action.

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