When an individual files Chapter 7 or Chapter 13 bankruptcy, they do so to avoid having their property and assets seized by debt collectors. While bankruptcy is typically not a long, drawn-out process once filed, it still takes an average of three to four months to obtain a discharge. A lot can happen in three to four months, including the sudden and unexpected death of the debtor. If the debtor should die before they obtain a discharge, their family may be left wondering, “What will become of their estate?”

When the Debtor Dies During a Chapter 7 Bankruptcy

If the debtor filed for Chapter 7 bankruptcy prior to their death, their case will continue on as normal. Upon filing for Chapter 7, the debtor agreed to hand over certain properties to the bankruptcy trustee in exchange for the discharge of all or most of their debt. Once the individual’s property was placed into the hands of the bankruptcy trustee, the debtor became an inessential function of the bankruptcy case, and the trustee can continue to sell the debtor’s property to repay the creditors despite the debtor’s passing.

Once the debts are discharged and the creditors paid off, the debtor’s heirs will not have anything left to worry about. In fact, the bankruptcy may have served as a nice bonus for them, as there will be no more debt for the creditors to try and collect, and therefore, there will be no claims made against the deceased’s estate.

When the Debtor Dies During a Chapter 13 Bankruptcy

If the debtor dies after filing a Chapter 13 but before the debt is discharged, how the case will be handled is not so clear. For all intents and purposes, it is up to the deceased’s heirs to decide whether they want to continue with the bankruptcy or have the case dismissed.

In a Chapter 13 bankruptcy, the debtor agrees to give all of their disposable income to a trustee, who will use that income to pay off the creditors in a predetermined order of priority, and over a period of three to five years. Because the debtor has not discharged their debt, but rather, set up an ongoing payment plan to diminish their debt, they get to keep all of their property.

Chapter 13 bankruptcy relies on the ongoing payments of the debtor to work. Because of this, a Chapter 13 cannot continue upon the debtor’s passing. Typically, when a Chapter 13 debtor does pass away, the court will dismiss the case. However, if the decedent’s beneficiaries want to continue with the case, the court may permit them to do so.

Whether or not a debtor’s beneficiaries should pursue a bankruptcy discharge depends on a handful of factors, including how large of a debt is left to be repaid, how much longer the case is anticipated to last, and when the discharge will occur. Furthermore, it would be beneficial for the deceased’s heirs to know what will become of the secured property in the bankruptcy estate, and whether or not they can manage to keep the secured property out of the bankruptcy at all.

The heirs may choose to work within the confines of bankruptcy in order to avoid any liens on the property, or they may choose to dismiss the case and work directly with the creditors outside of the protection of bankruptcy.

However, if the debtor has a large amount of unsecured debts, such as credit card bills and medical expenses, the debtor’s heirs will not be held personally responsible for them, but the debtor’s estate could become collateral. If this is the case, and the deceased does not have any substantial assets, the heirs may just want to walk away. However, if there is significant property to be gained, it would be wise to continue on with the case until the creditors are satisfied.

To learn more about how Washington State allocates debts upon death, review RCW 11.62.010.

Consult with a Renton Probate Attorney

At the Law Offices of Dan Kellogg, we have the experience and knowledge necessary to navigate the complexities of a probate-bankruptcy case. Typically, the allocation of debt is not something that heirs anticipate upon the passing of a loved one; however, if they stand to gain a significant amount of assets or property, taking on a deceased loved one’s debt may be a small price to pay for a large reward. If you and your loved ones were left with an estate that also happens to be in the middle of bankruptcy, contact Renton probate attorney Dan Kellogg to schedule an appointment online today, 425-227-8700.