What Happens When Bankruptcy is Interrupted?

Life is unpredictable. When the unthinkable happens, the last thing anyone wants to be thinking about is how to handle an incomplete bankruptcy — but, it does eventually need to be addressed. When a debtor passes away during the bankruptcy process, what happens to those debts? Are they inherited? Do they disappear? Do new rules crop up? How should the living handle the financial affairs of those who have passed on?

Death and Bankruptcy

There are some generalities that apply to the handling of both Chapter 7 and Chapter 13 bankruptcies that are interrupted by death:

• Death does not automatically end the bankruptcy. The bankruptcy continues, and must be reassessed in light of the new situation.
• Debts are not passed down to heirs, who can keep exempt assets; but creditors can still pursue the estate to fulfill the requirements of the debt, which can eat into property inheritances.

However, when a debtor in the middle of bankruptcy proceedings passes away, the manner in which his or her debts are handled by the courts and the survivors largely depends — like most aspects of bankruptcy — upon whether the bankruptcy falls under Chapter 7 or Chapter 13.

Chapter 13 and Chapter 7 Are Affected Differently

Chapter 7 is more or less unaffected by the passing of a debtor mid-bankruptcy. This is because in Chapter 7, the trustee manages and administers the redistribution of funds to creditors. The trustee can do their job with minimal debtor input.

Chapter 13, on the other hand, involves the debtor far more heavily. The debtor is responsible for making monthly payments to the trustee over the course of three to five years. If those payments are not made, the case can be dismissed. Therefore, when a debtor passes away during Chapter 13 proceedings, a new course of action must be decided upon by the court. The court will decide upon one of four paths for the case to take.

1. Continuation under Chapter 13.

2. Conversion from Chapter 13 to Chapter 7.

3. Case dismissal. A case dismissal is a mixed bag. A benefit of a case dismissal is that the family of the debtor is no longer obligated to continue the monthly payments to the trustee that are normally required by Chapter 13 bankruptcy. However, a dismissal also means that a discharge cannot be received, and in turn, that creditors may continue to collect from the deceased debtor’s estate.

4. A hardship discharge. If an individual is the spouse of the deceased debtor, they may ask the court to grant what is known as a “hardship discharge.” If granted, this discharge means that creditors cannot continue to pursue payments from the debtor’s survivors.

Even if they are supposed to be legally barred from doing so, particularly aggressive creditors may continue to seek payment. If you are being harassed by creditors, if a loved one dealing with bankruptcy has passed on, or if you are considering your bankruptcy options, contact Young, Marr, Mallis & Associates immediately for help. You can also call us at 215-639-5297.