When someone we love passes away, we grieve and celebrate their lives at a funeral or memorial session. Then we move on with our own futures. But if you are one of that person’s heirs and he or she died while in the midst of a Chapter 7 or 13 bankruptcy, then the estate distribution will be complicated.  Depending on the circumstances and type of bankruptcy involved, creditors are going to push for the seizure and/or sale of assets from the estate to satisfy their claims, which can substantially reduce the property that you and your fellow beneficiaries end up receiving.

Death while in a Chapter 7 bankruptcy

When a debtor in a Chapter 7 bankruptcy dies, the proceedings themselves are not affected because his or her trustee is the one in charge of liquidating all non-exempt assets to pay off creditors. This means that the bankruptcy process would carry on as if the debtor were still living.

If the case is still in its early stages, then you have the option of getting it dismissed and using the probate system to clear the debts and determine who inherits anything left over. Otherwise, any remaining assets after the bankruptcy will go into the decedent’s estate for distribution.

Death while in a Chapter 13 bankruptcy

If your loved one was in the middle of a Chapter 13 bankruptcy, then things become a lot more complicated. Their active participation in the court-approved repayment plan is a key part of eliminating the debt, and if they die, the estate administrator has to decide how the case will move forward. Options include:

  • Continuing the case
  • Getting the case dismissed (if you choose this option, creditors will likely come after the estate to settle any outstanding debt)
  • Requesting that the case be converted to Chapter 7
  • Applying for a hardship discharge to clear the remaining debt

If the debtor’s spouse was also named in the petition and wants to proceed toward discharge, then a repayment plan modification will likely be necessary to make up for the lost income, but a workable plan is possible. They may also request a hardship discharge or sever themselves from the deceased debtor in the bankruptcy so that their own case can carry on as usual or be converted to Chapter 7.

If a loved one in a New York bankruptcy has recently died, then contact a New York bankruptcy attorney who can advise you on what can be a very complicated situation, especially if Chapter 13 is involved. Your attorney can answer questions about death during bankruptcy procedure and help you devise the best strategy for satisfying the creditors while protecting as much of your inheritance as legally possible. Jayson Lutzky is a Bronx, New York bankruptcy attorney. He has helped many clients over the past 33 years get a fresh financial start through personal bankruptcy. Call 718-514-6619 to arrange a free in-office consultation. Visit www.MyNewYorkCityLawyer.com to learn more about Mr. Lutzky’s bankruptcy representation.