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Bankruptcy and Death

Posted on Sat Nov 10, 2018, on Estate Planning

Estate Planning Lawyer King of Prussia, PA

When a person dies, the executor has many responsibilities. One of those tasks is paying the deceased person’s debts. This is the case even when the deceased is in bankruptcy proceedings.  The proceedings do not necessarily end with death.  Heirs can only inherit what the deceased owned, after creditor satisfaction. So, if a person owned $1,000,000.00 but owes $1,500,000.00, the heirs get nothing.

When a person files bankruptcy as an individual, they have two options: Chapter 7 or Chapter 13. In Chapter 7 bankruptcy, the release of all debts upon bankruptcy discharge. Before that, however, assets are sold to pay back the creditors. Under Chapter 13, the debtor sets up a repayment plan with the bankruptcy trustee to pay back their creditors. After a three to five year period of repayment, any remaining debts are then discharged. Depending on which bankruptcy proceeding you’re under, the steps for what happens if you die during bankruptcy are different.

Chapter 7 Bankruptcy

If you die during Chapter 7 bankruptcy proceedings, there won’t be any impact on your bankruptcy case. The bankruptcy trustee will still be able to sell off your non-exempt assets to pay back your creditors. Once that process is complete, your remaining debts will be discharged.

Once the bankruptcy is complete, the executor of your estate will then be able to distribute any remaining assets according to your will or trust. This process requires the bankruptcy proceeding to be completed prior to your estate being probated. This could cause a delay in your heirs receiving their inheritance. It could also reduce the inheritance distributed to your heirs. The bankruptcy court may require the sale of additional non-exempt assets to pay your creditors in bankruptcy.

Having a trusted attorney on your side to help you plan for this is important to ensuring your rights and those of your heirs are protected.

Chapter 13 Bankruptcy

Chapter 13 requires repayment of creditors over the course of three to five years. If you have died, you’re unable to continue making your payments. If you die during your Chapter 13 repayment period, your executor can petition the bankruptcy court for a hardship discharge. This means that your bankruptcy proceedings will be discharged early and all of your remaining payments and debts will be forgiven.

The executor of your estate could also petition the bankruptcy court for a dismissal. However, this route does not discharge your debts. Going this route allows the creditors to file a claim against your estate for their remaining amounts.

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Obviously, there are different paths to take depending on which bankruptcy proceeding you’re under. With Chapter 13, a discharge is preferable to a dismissal. But these are nuances the average person won’t realize and don’t plan for.

If you would like to read more about Probate, follow this link to more detail about Probate and Estate Administration.  Unless you have experience in this area, a little bit of review can be helpful.

By using the services of an estate planning lawyer King of Prussia, PA trusts at Klenk Law, you ensure your heirs are protected in the event that you die during bankruptcy proceedings. If you are contemplating bankruptcy, you need the trusted advice of an estate planning attorney with the skill and experience required to help you navigate your decision.

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