When a person in bankruptcy dies, their debts are not passed to their heirs. Instead, the inheritance received by an heir may be reduced by the debts of the deceased. This means that creditors can still go after the property of the deceased to get back what is owed. How a creditor is paid back after the debtor’s passing varies depending on the type of bankruptcy.
Chapter 7 Bankruptcy
If the decedent is in a Chapter 7 bankruptcy, the case continues until the debts are paid off. In a Chapter 7 bankruptcy, the trustee has control over the debtor’s assets. In practice, the work done that requires the debtor to be physically present happens in the beginning stages of the bankruptcy. Since the trustee already has control over the assets, the trustee will continue to pay off the debts and will issue a discharge once they have been paid off. This, in turn, will affect the amount of inheritance that an heir of the decedent will receive by paying off debts. The decedent will not be able to receive the inheritance until the debts have been paid off.
Chapter 13 Bankruptcy
If the decedent is in a Chapter 13 bankruptcy, things get a little more complicated. In a Chapter 13 bankruptcy, the debtor pays back their debts over time through a repayment plan. This can last for 3-5 years. If the debtor has paid off their plan completely and dies before discharge, the trustee will file with the court to have the case dismissed. If there are remaining payments to be made, then the administrator of the estate has a few different options on how to take care of the bankruptcy. These options are as follows:
First, the administrator may request to dismiss the case. This means that the estate is now liable for the debts. If the estate does not have enough assets to cover those debts, it is likely that there will not be any assets left for the heirs to inherit.
Second, the administrator may request a hardship discharge. This discharges all debts and prevents creditors from attempting to get their share of the deceased debtor’s estate.
Third, the administrator of the estate may request to have the Chapter 13 bankruptcy converted to a chapter 7 bankruptcy. The benefit of conversion is that it discharges all debts and prevents creditors from attempting to get their share of the deceased debtor’s estate. The downside, however, is that it can be very difficult to get a conversion.
Finally, the administrator has the option to keep making payments on the chapter 13 case on behalf of the deceased debtor. The administrator will need court approval by showing that this route is in the best interest of the parties.