Does Bankruptcy Affect Wills or Estate Plans?
I’ve been asked recently, “How will a bankruptcy affect my will or estate plan?”
A fresh start
The purpose of bankruptcy is to give you a fresh start, which will allow you to go forward without the baggage or hassle of all your debts and to start over. Once the bankruptcy is completed, you obtain a discharge which wipes out all the bills that can be discharged.
Of course, taxes, some student loans, federal debts, child support, alimony, and/or criminal fines, parking tickets or speeding tickets, those you may get stuck with. But other than those general debts, the rest of the debts will be discharged and this will give you a fresh start.
With a fresh start, you can have a will which will say what happens with your assets, the things you own when you die. Or you can create an estate plan which helps you determine what will happen to your possessions when you’re no longer on this earth. A bankruptcy does not stop you from making a will or an estate plan.
And as long as those debts are wiped out, everything is fine. A will or estate plan? Let’s take a look at them. A will says that first, all your debts must be paid before your heirs or your beneficiaries receive money. If the debt has been discharged in a bankruptcy, it does not have to be repaid at the time of your death.
What about hospital bills and funeral expenses?
Of course, there will be your funeral expenses and possibly other debts related to your death. You may also have hospital bills that are not covered by insurance. All of that would have to be paid before your heirs or people who will receive money under your will would obtain theirs.
So a bankruptcy allows you to file a will. It allows your distributees or the people who would inherit to gather and share in your assets. The creditors, the people you owed money to, cannot come back and go after your beneficiaries once those bills are wiped out and discharged.
The old creditors cannot come back
Even if you have a million dollars on the day you die, and your relatives are waiting for that money, those creditors can’t say, “Hold on, you owed me money from 10 years ago or five years ago before you filed the bankruptcy. You owe us that money now because you have a million dollars.” They can’t.
Once the debt is discharged or wiped out, it’s permanent. They never, ever can come after you again. So it’s good to have a bankruptcy. Clear up your debts. Get a fresh start. Move forward in your life. If you’d like to discuss it more in depth, give me a call. I’ll be happy to do an analysis with you to determine what’s best for you.