What happens if a Chapter 7 or Chapter 13 debtor dies during the pendency of a bankruptcy case?
The surviving family members must finish the process. Bankruptcy goes through different channels when the debtor passes away. Learn your legal rights in a third-party bankruptcy case.
Chapter 7
A Chapter seven proceeding continues until discharge, whether the person is alive or not. The easiest Chapter of the two, the liquidation method relies on the trustee to finish the case, not the debtor. A court-approved trustee will carry on the duties assigned until debts are settled.
Since most deceased parties have an estate, creditors will chase after it to clear their outstanding debt before beneficiaries can touch it.
Chapter 13
The debtor needs to live to complete the payments in the court-approved repayment plan. Unlike Chapter 7 bankruptcy, Chapter 13 dismissal is an option in case of a debtor's death. Dismissal is messy and complicated because there's more than one route. It's best to choose the dismissal route that works for both you and the creditors.
- A regular dismissal is the easiest option. However, creditors want payment regardless of a death situation, so creditors turn to the deceased member's estate and stake a claim there. More than likely, creditors receive payment from the estate before anyone else and there's no way anyone can block it.
- Persist in the Chapter 13 case and pay the outstanding debt as if the death never happened. If the survivors will compensate the remaining three-to-five year plan, the courts will allow it. However, for more than one survivor or beneficiary, not everyone will agree to do this.
- A hardship discharge is for debtors who can't pay the repayment plan payments due to sudden hardship. This also works for surviving families who can't finish paying the debt due to the debtor's death. A successful discharge erases debt, and creditors can't touch the estate to recoup their loss.
- Converting to Chapter 7 is the hardest of the four. Courts rarely allow it because the debtor needs to exist to complete the transfer. A successful conversion satisfies all parties involved. Liquidation requires a trustee and the debtor's valuable belongings, property, assets, and real estate.
This unusual situation is rare. Even then, it doesn't hurt to know your rights in case this happenstance occurs to someone you love. For more information on bankruptcy, contact us.
