What Happens If You Die While in Chapter 13?

Chapter 13 Explained

Chapter 13 is the bankruptcy option usually selected by property owners who have the means and desire to hold onto some of their property, such as a house, while they repay their debts. Unlike Chapter 7 bankruptcy, in which most assets are liquidated to pay off creditors with the remaining debt discharged, Chapter 13 bankruptcy essentially functions as a payment extension. Debtors are given three to five years to pay off the majority of their outstanding balances, and as such are allowed to retain their property. Certain income guidelines must be met to qualify for Chapter 13 bankruptcy. These guidelines vary depending on the median income where you live.

What happens to your Chapter 13 case in the event of your death depends in part on the progress of the case when you pass away. If the bankruptcy is in early stages--for instance, if you have filed but your monthly payments haven't been determined--the courts and your creditors may decide to proceed with the case as if you were still alive to at least get a decision on what your financial obligations are. If you are already in the payment stage, your survivors must negotiate with the courts and/or creditors to determine the next steps.

In conjunction with the administrator of your bankruptcy, your survivors have a few options available to them. They can petition to have your Chapter 13 bankruptcy converted to a Chapter 7 bankruptcy. When that happens, your property is liquidated, your creditors are paid with the proceeds, and any outstanding debt is wiped clean. Another option is a hardship discharge. If you made enough headway in your payments before your death, your survivors may be able to win a hardship discharge of your bankruptcy. If they can show that your creditors already have received as much as they would if you had opted for Chapter 7 bankruptcy, the court may discharge the Chapter 13 agreement, and the remaining debts are forgiven. A hardship discharge could protect any property that is in your estate, which may be liquidated if your bankruptcy is converted to Chapter 7.

Bankruptcy law is complex, and it gets more complicated with the original filer is deceased. Survivors should consider contacting a bankruptcy attorney for help navigating the system. Your state bar can provide lawyer recommendations.