In a typical probate administration, the personal representative named in the deceased person’s will must pay off any valid debts presented to the estate. What if the decedent was already in bankruptcy at the time of his or her death? What happens to the bankruptcy case?
Bankruptcy and probate are actually similar legal procedures. Both require a third party to take possession of a person’s assets. In bankruptcy that person is a court-appointed trustee, while in probate it is the personal representative. A bankruptcy trustee does not take all of a debtor’s assets, however, only those that are not specifically exempt from bankruptcy or creditor judgments. Those assets remain with the debtor and pass to his probate estate–and thus the personal representative–upon death.
Chapter 7 vs. Chapter 13
The type of bankruptcy filing is important. Individual debtors generally file for either Chapter 7 or Chapter 13 bankruptcy. A Chapter 7 bankruptcy involves a straightforward liquidation, that is the trustee collects all of the non-exempt assets and uses them to pay back as many creditors as possible. Any remaining debt is then “discharged” by the bankruptcy court, meaning the creditor can no longer seek to enforce collection.
If a Chapter 7 debtor dies during bankruptcy, there will likely be no effect on the actual bankruptcy case. The trustee can still liquidate property and pay creditors without the debtor’s involvement, and any exempt property remains subject to probate.
Chapter 13 is a little more complicated. A Chapter 13 debtor submits a repayment plan to the bankruptcy court. This allows the debtor to repay their creditors over a period of three to five years. Obviously it is difficult for a debtor to make monthly payments if they are dead.
While death does not automatically terminate a Chapter 13 case, the debtor’s estate or heirs may petition the bankruptcy court for a “hardship discharge,” which terminates the payment plan and discharges any remaining debt. In the alternative, the estate or heirs could seek dismissal of the bankruptcy case. However, this means any remaining debts are not discharged, and creditors may still file a claim against the probate estate. It may also be possible, depending on the circumstances of a case, to simply continue the Chapter 13 repayment plan.
Get Advice from a California Estate Planning Lawyer
If you are contemplating or have filed for bankruptcy, you should consult with a qualified San Diego estate planning attorney about how your case may affect your will or trust. As noted above, certain assets are exempt from bankruptcy. In California, a debtor can actually choose from two sets of exemptions, one federal and one state. The choice of exemptions can impact what property may be left to your heirs. You may also have questions about how your marital status affects bankruptcy and probate. Schedule a consultation with the Law Office of Scott C. Soady if you need help with this or any other estate planning issues.