Death: The Ultimate Hardship
It may sound logical that, if you pass away after filing a bankruptcy case, your bankruptcy proceeding will terminate along with you. This is not so, however. A bankruptcy case will continue after the death of a filing debtor in either a Chapter 7 or a Chapter 13 context, though there are steps your attorney might take to either shepherd the case through to a successful, post-mortem discharge or to terminate or dismiss the case, if necessary.
Death in Chapter 7 Bankruptcy
Bankruptcy Rule of Procedure 1016 governs the bankruptcy process after the death of a Debtor. Rule 1016 states that, in a Chapter 7 liquidation bankruptcy, death does not cause the case to be dismissed. Rather, the case continues onward as if the Debtor had not died. Because Chapter 7 is a "liquidation bankruptcy," meaning that there is the possibility that assets of the Debtor may be sold off by the Chapter 7 Trustee administering the case for the benefit of the Debtor's creditors, those assets remain even where the Debtor has passed on.
Death in Chapter 13 Bankruptcy
In a Chapter 13 "reorganization bankruptcy," the death of a filing Debtor will allow the Debtor's attorney to file a notice dismissing the case. The reason for this difference is that, in a Chapter 13, there is a voluntary right to dismiss the case at any time. Additionally, because Chapter 13 is not a liquidation bankruptcy in which assets are seized and sold off by the bankruptcy trustee, there are no assets that are part of the legal "bankruptcy estate" awaiting administration (that is, liquidation) at any time. However, there may be circumstances where a Chapter 13 should not be dismissed. For example, if the Debtor who has passed away is married and has left a spouse behind as part of a jointly filed bankruptcy. That spouse may yet need the relief of the bankruptcy discharge. Under these circumstances, there are several options available to the surviving spouse: an early "hardship discharge" of the Chapter 13 (difficult to obtain but possible under such circumstances: a judge here in the Eastern District of Michigan has opined on this subject, holding smartly that "Death is the ultimate hardship"), modification of the Chapter 13 Plan so that the surviving spouse can afford to make the payments, conversion to a Chapter 7 bankruptcy, or even bifurcation of the joint case into 2 separate cases---one for the deceased Debtor, which may be then dismissed or for which a hardship discharge may be obtained, and another for the surviving Debtor, moving forward as a modified Chapter 13 or converted to a Chapter 7, depending on the asset situation (many people file Chapter 13s in order not to lose important assets in a Chapter 7).
Death During Bankruptcy: The Bottom Line
In short, there are many options available in an unfortunate situation such as this. All of them require the guiding hand of experienced Michigan bankruptcy attorney, as unforeseen circumstances, just as they are a part of life, can be a part of any legal process as well, regardless of how straightforward it may seem from the outset. It is always a risky maneuver to attempt a bankruptcy without legal counsel who can deal with such unfortunate circumstances should they occur, when you will be unable to. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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