Understanding How Bankruptcy Procedures Can Affect Probate Estates

While filing for bankruptcy may seem like a viable option for discharging a decedent's debts, especially when there isn't enough money in the estate to pay off debts, it isn't always legally possible. When it is, several factors affect how bankruptcy procedures (either chapter 7 or chapter 13) can play into a decedent's estate.

Filing Chapter 7 Bankruptcy

Although federal rules governing bankruptcy procedure do not allow probate estates to file for bankruptcy, the law permits the bankruptcy court to continue with chapter 7 bankruptcy cases already in progress following the individual's death. In a Chapter 7 bankruptcy case, the court liquidates the decedent's assets to pay off creditors. Any unpaid debts are then discharged. With the discharge of debts and the inclusion of exempt property (assets the estate gets to keep), there may be assets left in the estate to distribute to the decedent's heirs.

Filing Chapter 13 Bankruptcy

Although a chapter 13 bankruptcy (which involves a debt repayment plan) can continue after the debtor dies if it's in the best interest of his or her beneficiaries, the decedent's estate cannot file a petition for bankruptcy if a case doesn't already exist. That's because, according to bankruptcy law, the debtor must be an individual. But since the person has already died, the executor of the estate is not allowed to file for bankruptcy on the decedent's behalf. However, if a beneficiary of the estate agrees to fulfill the terms of the repayment plan the court approves -- particularly if real estate is involved -- and the bankruptcy case moves forward, that person may be required to pay back less than the outstanding balances the decedent owed to his or her creditors.

Exceptions to Filing for Chapter 13 Bankruptcy

Beneficiaries who inherit property threatened by foreclosure may file for chapter bankruptcy on their own if they otherwise qualify. A chapter 13 payment plan is an option for keeping the property as long as a beneficiary can afford to pay the regular mortgage payments in addition to the delinquent mortgage payments and late penalties.

Settling the Estate Without Bankruptcy

Any property or other assets a person owns when he or she dies is referred to as estate property. Upon an individual's death, assets are liquidated to settle unpaid debts the person leaves behind. If the estate includes more assets than debts, any assets remaining go to the decedent's heirs only after creditors file claims against the estate with the probate court and receive payment.

However, if the estate has more debts than assets, any remaining debt is written off and the person's beneficiaries receive no inheritance. Bankruptcy isn't necessary since the balance of debt the decedent's estate owes is not collectible and therefore is written off. Although family members generally aren't legally responsible for paying off a deceased relative's debts, the probate court can order that assets belonging to the decedent's estate be used to pay off creditors. In certain exceptions, such as community property states, the surviving spouse may be liable for repaying the deceased spouse's debts.

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