What if a Debtor in Bankruptcy Dies?

06 Oct What if a Debtor in Bankruptcy Dies?

What happens when the debtor in bankruptcy dies or becomes incompetent before the case is closed? What does it do to the bankruptcy court proceeding? The answer is clear and is set out in the Federal Rules of Bankruptcy Procedure (FRBP).

In the case of a Chapter 7, death or incompetency does not change anything. Because the Chapter 7 trustee is in charge of administering the estate for the benefit of the unsecured creditors, it makes sense that the case be allowed to continue, without interruption.

The situation may be different in a bankruptcy proceeding where reorganization of the debtor’s finances is the ultimate goal such as Chapters 11, 12 and 13. In that type of case, the court is permitted to determine whether or not the case should be dismissed or continued.

Federal Rules of Bankruptcy Procedure answer this question in a direct and succinct way. Rule 1016 states as follows:

Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer’s debt adjustment, or individual’s debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.

In a reorganization bankruptcy, it really depends on whether or not the case can continue forward. If continuing the case will be helpful to the parties, it may proceed.

This bankruptcy rule makes it possible for the administrator of the debtor’s estate to protect exempt assets for the beneficiaries or for a conservator to manage creditors of an incompetent person.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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