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A few years ago, I was in a pretty serious car accident. During the aftermath, I became really familiar with a lot of different types of lawyers. I worked with personal injury lawyers, insurance lawyers, and many others. Perhaps the most important, though, was the estate planning lawyer. I was really young, and neither my wife or I had thought about starting a will. But the accident kind of scared us into it. What would happen if one of us were to die? Even when still in the hospital, I was working with the lawyer to draw up a will. Now, I have some peace and security about what the future will be like if something should happen to me. And I have a lot of experience working with various types of lawyers! The accident was kind of a blessing in disguise in that way.

Two Options For Handling A Chapter 13 Bankruptcy When The Debtor Dies

Law Blog

Death comes to everyone at one point or another. Unfortunately, sometimes that moment occurs for some people while they are in the midst of a chapter 13 bankruptcy. If your loved one passed away while their chapter 13 case was still active, you may be wondering what to do. Here are two options for handling this situation.

Apply for a Hardship Discharge

When a bankruptcy petitioner dies during the proceeding, the court's first reaction will typically be to dismiss the case. This is because a chapter 13 requires the debtor to make payments into the plan, which can't be done if the person is not around to earn income. In some cases, the court will let the heirs continue with the case, but this option is not available in every bankruptcy court jurisdiction.

If letting the case be dismissed would create some type of hardship related to your loved one's death, you could petition the court for a hardship discharge. However, the court will only approve this option if the case meets three requirements:

  • The chapter 13 payment plan can't be changed
  • Circumstances beyond the person's control prevents him or her from continuing making payments
  • Creditors have received the same amount of money they would if the debtor had filed a chapter 7 bankruptcy

The person's death essentially fulfills the first two requirements. However, the third factor may lead to a denial, especially if the person died before he or she was able to make any payments into the plan. If the person did make some payments, you'll need to talk to the trustee to see if the minimum amount was paid to creditors before filing a hardship petition.

Convert the Case to a Chapter 7 Bankruptcy

The second option for handling this situation is to have the case converted to a chapter 7 bankruptcy. This type of bankruptcy essentially liquidates the person's assets and distributes them to creditors, and the petitioner doesn't have to be around for the court to do this.

However, this option is generally only available to cases with joint petitioners. The second petitioner can use the income loss resulting from the death of the joint debtor to pass the chapter 7 means test and convince the court to let the case be converted.

If there are no joint petitioners, it may be possible to still get a chapter 13 case converted. However, you will typically have to provide the court with a compelling reason to allow this. For instance, the deceased was paying off significant tax debt, some of which could be discharged in a chapter 7 bankruptcy. The court may let the case be converted if allowing the tax debt to remain would create a significant burden for heirs and beneficiaries.  

For other options for dealing with this situation or help managing a bankruptcy case after the petitioner has died, contact a bankruptcy attorney or look up additional reading online.


29 August 2016