What Happens When a Debtor Dies Before the Bankruptcy Discharge?

What happens if a person files for bankruptcy and then dies before reaching the point in the case when the court wipes out (discharges) his or her debts? If the debtor filed for Chapter 7 bankruptcy, the case will continue on, regardless of the debtor's death. If, however, the debtor filed for Chapter 13 bankruptcy, whether the case ends or continues depends, in large part, on what the debtor's heirs want to do.

When a Chapter 7 Debtor Dies

Under bankruptcy law, if the debtor in a Chapter 7 bankruptcy dies, the case continues to the extent that it can.

How does Chapter 7 bankruptcy work? In a successful Chapter 7 bankruptcy, the court discharges most (or all) of the debtor's debts. In exchange, the debtor must turn over certain property to the bankruptcy trustee, who sells the property and uses the proceeds to repay the debtor's creditors. (To learn more, see An Overview of Chapter 7 Bankruptcy.)

Because it is the trustee's responsibility to administer the bankruptcy estate, the debtor's involvement in the case is not essential. The trustee can continue to sell assets and repay creditors without the help of the debtor. In some cases the trustee may "abandon" assets that don't make sense to sell. But again, the debtor's assistance is not necessary for the trustee to do this.

The court will discharge the debtor's debts just as if the debtor were alive while the trustee continues to take care of the property in the case. This is a nice plus for the debtor's heirs – because the deceased's debts are wiped out in the bankruptcy case, the debtor's creditors won't be able to make claims against the deceased's estate.

When a Chapter 13 Debtor Dies

What happens when a Chapter 13 debtor dies is less cut and dried. For the most part, whether the case will continue or be dismissed depends on the wishes of the deceased's heirs.

How does Chapter 13 bankruptcy work? In Chapter 13 bankruptcy, the debtor must devote all of his or her "disposable income" to a repayment plan that lasts for three to five years. Through the plan, the trustee repays the debtor's creditors, sometimes in full and sometimes at a deep discount. In return, the debtor can keep his or her property. Chapter 13 has some other helpful features, like allowing the debtor to catch up on back mortgage payments. (Learn more in An Overview of Chapter 13 Bankruptcy.)

Because the debtor plays a big role in the administration of a Chapter 13 case, such as making the payments that fund the Chapter 13 repayment plan, the case does not automatically continue when the debtor dies. The court has the power to dismiss the case. Or, if the heirs want to continue the case and take over the duties of the debtor (including making the Chapter 13 plan payments), the court may allow the case to continue.

Should the Heirs Continue the Chapter 13 Case?

Whether it makes sense for the heirs to continue with the Chapter 13 case depends on any number of factors, including what will happen to secured property in the bankruptcy estate, whether the heirs can manage to keep the secured property outside of bankruptcy, how much debt the debtor has, how much longer the Chapter 13 case will last, and when the discharge will occur. Below is a discussion of a few of these factors.

Home secured by a mortgage. Under federal law, if a person with a mortgage dies, the lender must work with the deceased's heirs to change the mortgage into the heirs' names. If the deceased filed bankruptcy to keep a house out of foreclosure, the heirs must decide if they want to keep the house. If they do, they could continue with the Chapter 13. Or, if they have the means to refinance the home, they could dismiss the Chapter 13 case and refinance.

Other secured debts. If the deceased had other secured debts, such as a vehicle, jewelry, or furniture, and the heirs have the money to purchase and/or the means to refinance, they could dismiss the case and try to work with those lenders outside of bankruptcy as well. Or the heirs could continue on with the case, in order to take advantage of bankruptcy's treatment of secured debts such as lien avoidance and lien cramdowns, which may allow the heirs to pay less on the debts.

Unsecured debts. What if the deceased did not have secured property (like a home or car), but instead a large amount of unsecured debt (like credit card debt and medical bills)? The heirs won't be personally liable for these debts, but the creditors could seek payment from the decedent's estate. If the decedent does not have significant assets, the heirs may want to dismiss the case. But if the heirs stand to inherit significant assets, they may want to continue the bankruptcy case so that the creditors get paid pennies on the dollar, leaving a larger estate for the heirs.

Options for the Surviving Spouse in a Joint Chapter 13

If the Chapter 13 is a joint case, then the surviving spouse has several options.

• If the loss of the spouse also means a loss of income, the surviving spouse could ask the court to lower the plan payments.
• If the couple had many debts that were not jointly owed, the surviving spouse could ask the court to separate the case from the deceased's, so that the surviving spouse pays only his or her debts, and not those of the deceased.
• The surviving spouse could ask the court for a hardship discharge to receive the discharge early (See the Chapter 13 Hardship Discharge for more information).