Bankruptcy & Death: Two Complex Areas Of The Law

The intersection between bankruptcy and death is complex since it involves two very different areas of the law. Hanson & Payne’s experienced team of bankruptcy attorneys is here to assist Milwaukee area residents, businesses, and lenders who are navigating this difficult set of circumstances.

There are two main ways a bankruptcy proceeding can be impacted by a death. The first is if someone who has filed for bankruptcy dies while their case is pending. The second is when someone who has filed for bankruptcy inherits money while their case is pending. In this blog post, we will cover a few things it is important to understand about both of these scenarios. 

What Happens When Someone Who Filed For Bankruptcy Passes Away? 

The French philosopher Michel Eyquem de Montaigne wrote that “Death, they say, acquits us of all obligations.” This observation is proven true in the bankruptcy courts. 

When someone who has filed for bankruptcy passes away while their bankruptcy case is pending, the bankruptcy case must be closed before the deceased person’s estate can be probated. Depending on how much debt there is, and which chapter of the bankruptcy code the case was filed under, this can take awhile. 

For cases filed under Chapter 7, the bankruptcy court will work with the deceased person’s personal representative to process the case pretty much as they would if the debtor had not died. Available assets are liquidated, and the proceeds are used to pay off creditors. Assets that were exempt from bankruptcy are then distributed according to the deceased person’s estate plan, or the laws of intestacy if he or she had no will in place. 

Chapter 13 bankruptcies are years-long, court-supervised repayment plans. If a Chapter 13 filer passes away while his or her case is ongoing, the deceased person’s personal representative can ask the bankruptcy court to: 

  • See the Chapter 13 case through then allow the personal representative to administer the estate as normal;
  • Convert the Chapter 13 case into a Chapter 7 case and proceed as discussed above; or 
  • Dismiss the Chapter 13 case and allow the personal representative to administer the estate as normal.

The bankruptcy judge will decide what the best path forward is for everyone involved. 

The big thing to take away from all of this is that heirs cannot touch their loved one’s assets until the bankruptcy case is closed. This is obviously very frustrating, and can seem unfair, but the courts try to process these cases quickly so family members can grieve their loved one. 

What If Someone Inherits Assets While Going Through Bankruptcy? 

The other situation where a death can dramatically impact a bankruptcy proceeding occurs when a debtor inherits assets after filing for bankruptcy. If the death occurs within 180 days of the bankruptcy filing, the inheritance may be pulled into the bankruptcy case.

In a Chapter 7 case, the inherited assets may be liquidated and the proceeds used to pay off creditors. In a Chapter 13 bankruptcy, the inherited assets may be used to calculate how much money the debtor must pay the court each month of his or her supervised repayment plan. 

Milwaukee Area Bankruptcy Attorneys You Can Trust 

It is rare, but not unusual, for a death to impact a bankruptcy filing. The overlap of these challenging and emotionally fraught areas of law can be overwhelming. Hanson & Payne, LLC’s experienced team of bankruptcy attorneys would be honored to assist you if you find yourself in this situation. Please contact us to schedule a meeting.