How Death and Bankruptcy Work in Minnesota
It is not a situation that happens every day, but the unpredictability of life has seen it happen before. A debtor begins the necessary steps to file bankruptcy, and then somewhere during the process, they pass away. Sudden and confusing, the heirs not only have to deal with the grief of that sudden passing, but they are also left with a complicated question – what happens to their ongoing bankruptcy case?
As with many aspects of bankruptcy, the answer to this question depends on what type of bankruptcy they were filing. Depending on if they were filing Chapter 7 bankruptcy or Chapter 13 bankruptcy, the results of the case may change.
What Happens After Death During Chapter 7 Bankruptcy?
In Chapter 7 bankruptcy, the process actually requires very little from the debtor. The debts are completely discharged in exchange for a bankruptcy trustee taking non-exempt possessions to sell in order to satisfy at least some of the creditors. Once the process has started, it isn’t very involved for the debtor. As such, the bankruptcy case will likely continue. Also, ALL of your property is usually protected in bankruptcy.
If the debtor dies before the meeting of creditors or doesn’t finish the financial managmenent course, then the case is dismissed and the debts come back. This can be bad for the heirs, because the creditors of the deceased have some rights to collect from the property of the deceased.
If the debtor dies after completing the financial management course and attending the meeting of creditors, then the court will usually still grant the discharge order. The discharge order comes at the end of the chapter 7 and means that the debts are officially gone. This is good for the heirs because then they don’t have to pay the debts from the assets of the deceased.
What Happens After Death During Chapter 13 Bankruptcy?
Unlike Chapter 7 bankruptcy, death during Chapter 13 bankruptcy is a little more complicated. This chapter of bankruptcy requires the debtor to form a repayment plan for the debt. They devote their disposable income to repayment for a set number of years that allows them to discharge and catch up on some of their debt in exchange for keeping most of their assets.
Unlike Chapter 7 bankruptcy, the debtor is very involved in the bankruptcy process once it starts. So if they pass away during it, the Chapter 13 bankruptcy case may not automatically continue. If this happens, the heirs have two options. The first is that the court can dismiss the Chapter 13 case, and the second is that the heirs can continue the bankruptcy case.
Should Heirs Continue a Chapter 13 Bankruptcy Case?
If a debtor passes away during a Chapter 13 bankruptcy case, the heirs to the estate can assume the bankruptcy case themselves, but why should they do this? In these cases, the Chapter 13 repayment plan is likely near completion or the heirs simply want to keep secured property for the estate.
Secured property, or property that has collateral that can be collected such as a home mortgage, will be taken if the Chapter 13 bankruptcy case is closed. Certainly the family can close the bankruptcy case and let the house go, or they can assume the mortgage themselves and refinance.
Essentially, the heirs of a Chapter 13 bankruptcy debtor will want to continue the bankruptcy case if the deceased has a large amount of secured debt and assets. It is a choice to let this go, but if the repayment plan is already well underway, then it is more worthwhile to just see it through.
When Should Heirs Not Continue Chapter 13 Bankruptcy?
Alternatively, there are circumstances in which the heirs may want to close a Chapter 13 bankruptcy case. If the deceased had a huge amount of unsecured debt, like medical or credit card bills, then you are better off closing the bankruptcy case as soon as possible. As these debts are not secured with collateral and cannot be inherited by the heirs of an estate, they essentially die with the deceased. There is no reason to continue the case in order to pay them.
Are you about to enter bankruptcy? Do you have a loved one that passed away with an open bankruptcy case? If you need bankruptcy help, contact us today to see what Walker & Walker can do to help.