ARE ASSETS LOST WHEN A DEBTOR DIES BEFORE THE DISCHARGE IS OBTAINED

If a bankruptcy is filed and then the debtor dies, can the discharge still be obtained is a question that is asked more than one would think.  A Chapter 7 bankruptcy case can take 5 or 6 months to complete.  A Chapter 13 bankruptcy case will often last 3 to 5 years.  The minimum time a Chapter 13 case is going on is three years unless all unsecured  creditors have been paid in full before the three years of payments have been made.

The Bankruptcy Code allows the continuation of a bankruptcy case if the debtor dies in most situations.  You may wonder why it would be important to obtain a discharge for a deceased debtor.  The fact is, most of the time, the bankruptcy case did not cause all of the debts of the debtor to be paid in full.

WHAT HAPPENS IF NO DISCHARGE IS OBTAINED?

If no discharge is obtained, the creditors can go after the assets of the debtor in the Probate Court proceeding.  This means that the heirs of the debtor may lose property that the debtor wanted his or her family to have if he should die.

Debtors want to be able to provide for their heirs.  The decision to file a bankruptcy case is never taken lightly.  Debtors all feel like they are somehow failures when they file a bankruptcy case.  No one ever started a business, took a job, got married or had children so they could have to file bankruptcy.  It is human nature to believe that you are going to succeed at what you are doing.

HOW IS A DEATH OF A DEBTOR HANDLED IN A BANKRUPTCY CASE THAT IS ONGOING IN THE DISTRICT OF SOUTH CAROLINA?

The Bankruptcy Court has recently addressed this issue in a case here in South Carolina.  The Bankruptcy Court found that if a debtor died, the Personal Representative or person appointed to handle the estate of the debtor should petition the Court for permission to continue the bankruptcy case.  This is a small change in the District of South Carolina, but, it does not appear to be a problem.  The Bankruptcy Judge ruled that a motion should be filed to allow the Personal Representative to continue the bankruptcy case.

This allows the Bankruptcy Judge to determine if this is the proper case to allowed to continue being administered by the Bankruptcy Court.   This makes sense as the Bankruptcy Judges actually manage their cases as part of their duties.  Knowing about this issue soon after the death of the debtor allows the Court to make the proper determinations in a timely manner.

Bankruptcy Rule 1016 sets forth what will happen in a Chapter 7 case.  This rule directs that the liquidation of the debtor’s assets will continue as if the debtor had not died.   Only in a very rare situation will the Chapter 7 Bankruptcy Case be dismissed because a debtor died.

In a reorganization case under Chapter 11, Chapter 12 or Chapter 13 of the Bankruptcy Code, this same rule states that the case may be dismissed, or further administration of the case is possible and in the best interest of the parties, then the case may be continued.   If the Court determines that the case should be continued, the case is concluded to the extent possible, as if the debtor had not died.

Many times in a reorganization case, the debtor was behind on payments to a creditor and was trying to keep an asset such as a car or house.  Most of the time, the debtor was significantly behind on payments to the creditor.   If the case was dismissed, the creditor would be entitled to either be caught back up at once, or the creditor could foreclosure or seize the property.

Many times, the family of the debtor will continue the payments to keep the property.

What happens when a debtor dies during a bankruptcy case is never a simple matter.  Using competent attorneys for advice may allow the family to keep their property.

 

About Nathan Davis, Esquire

Born in Charleston, South Carolina, Nathan Davis has been practicing law for many years. Mr. Davis has a wide variety of experiences having practiced domestic relations, criminal law, social security law having also practiced collection law in the past. This knowledge is helpful when someone needs to restart their financial life. The practice is now primarily bankruptcy and debtor representation work, but, Mr. Davis continues to also practice real estate law, trusts and estates and a general litigation practice. I believe that the most important part of representation is trying to leave you better off when the case is finished than when you started. Although I will do as my client directs, I will always tell you if I think that you are making a mistake. Bankruptcy is about a "fresh start". If you do not make changes in what you are doing, you will be doing what you are doing now in the future. There is no shame in bankruptcy or other steps that you may take to start your life over. Too often, people worry more about things than about themselves, their family or their future.
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