IF THE DEBTOR DIES DURING BANKRUPTCY

When a debtor dies during a pending Chapter 7, Chapter 11, Chapter 12 or Chapter 13 bankruptcy case, the case may or may not be dismissed depending on a few factors.  The first factor is the bankruptcy chapter that controls the case.  For a Chapter 7 case, the death of the debtor does not terminate the bankruptcy.  For an individual bankruptcy case filed under Chapters 11, 12, or 13, the death of the debtor will affect the bankruptcy case, but does not necessarily terminate it.

During a Chapter 7 bankruptcy the court will continue the bankruptcy proceedings despite the death of the debtor.  The reasoning is that all of the debtor's assets, exemptions, and debts are determined at the time the case was filed, and the trustee is now in charge of liquidating any non-exempt assets.  The participation of a debtor is not actually necessary.  Bankruptcy Rule 1016 addresses the situation concerning the death of the debtor, and directs that "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."

Death of the debtor during a Chapter 11, 12 or 13 case poses different complications.  Bankruptcy Rule 1016 states that "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" (emphasis added).  While dismissal of the bankruptcy is common in Chapter 11, 12, or 13 cases, the trustee may seek to continue the case per Rule 1016, the case could be converted to a Chapter 7, or the executor or administrator of the decedent's estate may petition the bankruptcy court for a hardship discharge.

Since the bankruptcy discharge will only prohibit collection against the debtor personally, the question becomes, how will the debtor's discharge affect the heirs to the estate?  In most cases, an unsecured debt that is not a joint obligation will not pass to the decedent's heirs.  However, a creditor could obtain a judgment against the deceased debtor's estate and attempt to collect from any available property.  Consequently, the discharge is important to provide peace of mind and avoid any potential debt litigation or collection action.

The federal bankruptcy laws are very broad in scope and provide for benefits even under unusual circumstances, such as the death of a bankruptcy debtor.  If you are struggling with debt you cannot afford to pay, speak with an experienced attorney and discover how the bankruptcy laws can help.