A while back we discussed what happens when a person inherits an underwater house. A similar situation is when a relative dies while in New York bankruptcy. This can be complicated for the heirs of the debtor who may inherit some of the debtor’s assets, if there are any. The outcome depends on what chapter the deceased debtor filed in.
If the case is in chapter 7, then it continues as though the debtor didn’t die. This procedural rule makes sense given that chapter 7 is the straight liquidation chapter. If the case is still early in the process, it might save time for all parties involved to dismiss it and resolve the estate’s debts and who inherits the residue via the probate system like with the inherited underwater house. Otherwise, any assets remaining after the chapter 7 case will revert to the debtor’s (now the decedent’s) estate for distribution.
For chapter 13 cases, the rules are a bit different. Chapter 13 requires the debtor to make monthly payments for three to five years out of current income, and since dead people have no income, the repayment plan usually becomes unfeasible. Usually, the debtor’s heirs will voluntarily dismiss the case and proceed to probate, which will treat the debts largely as a chapter 7 bankruptcy would. The exception to dismissal is if the debtor’s spouse was also named in the chapter 13 petition and wants a discharge anyway. This will very likely require a modification to the repayment plan to cover the lost income, but it can work. Debtors’ heirs and joined spouses can also seek a hardship discharge, which is often warranted under the circumstances. Another alternative is severing the spousal debtor from the deceased debtor in the chapter 13 case. The deceased debtor’s case may be discharged or converted to chapter 7, and the survivor’s case can continue in chapter 13 or convert to chapter 7 as well.
Death during New York bankruptcy is rare, but it is a possibility that might occur the longer people struggle with underwater mortgages or with other debts. Whether you think that you or your spouse might not survive a bankruptcy, or if a relative in a pro se bankruptcy has died and the situation has become more complicated, then it’s definitely worthwhile to hire a bankruptcy lawyer.
For answers to more questions about death in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced New York bankruptcy attorney Bruce Weiner for a free initial consultation.
