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How Bankruptcy May Impact Your Estate Plan

There are two significant ways filing for bankruptcy may impact your estate plan. The first is if you file for bankruptcy, then die while your case is pending. The second is when someone you have named as a beneficiary files for bankruptcy shortly before your death. In this blog post, we will cover a few things it is important to know about both of these scenarios. 

As always, remember that blog posts like this only touch the tip of the estate planning iceberg. If you have questions about an estate planning topic, please contact the Palmer & Slay team to set up a meeting. 

If someone passes away while their bankruptcy case is pending 

When someone files for bankruptcy, then passes away while their bankruptcy case is pending, the bankruptcy case must be closed before the deceased person’s estate is touched by his or her heirs. How long this takes depends on the complexity of the estate, and the type of bankruptcy involved. 

The larger an estate, or the more debt it has, the more complex it tends to be. 

By type of bankruptcy, we mean which chapter of the bankruptcy code it was filed under. Most personal bankruptcies are filed under Chapter 7 or Chapter 13 of the bankruptcy code. 

A Chapter 7 case is what most people think of when they think of bankruptcy. Available assets are liquidated, and the proceeds are used to pay off creditors. Most remaining debt is then forgiven. If a debtor dies while their Chapter 7 case is pending, the bankruptcy courts will work with the estate administrator to process the case pretty much as they would if the debtor had not died. Remaining assets are then distributed according to the deceased person’s estate plan, or the laws of intestacy if he or she had no will in place. 

A Chapter 13 bankruptcy is very different from a Chapter 7 bankruptcy. A Chapter 13 bankruptcy is a court-supervised, multi-year repayment plan. If the debtor in one of these cases dies, their estate administrator can ask the bankruptcy court to: 

  • See the Chapter 13 case through then allow your estate administrator to proceed as normal;
  • Convert the Chapter 13 case into a Chapter 7 case and proceed as discussed above; or 
  • Dismiss the Chapter 13 case and allow your estate administrator to proceed as normal;

The bankruptcy judge will decide what the best path forward is for everyone involved. 

When someone who has filed for bankruptcy inherits assets 

The other time a bankruptcy case can impact an estate plan is when someone named as a beneficiary has recently filed for bankruptcy. If the debtor filed bankruptcy within 180 days of their loved one’s death, any inheritance he or she receives may be pulled into the bankruptcy case. 

In a Chapter 7 case, the inherited assets may be liquidated and the proceeds used to pay off creditors. In a Chapter 13 bankruptcy, the inherited assets may be used to calculate how much money the debtor must pay the court each month of his or her supervised repayment plan. 

Preserving Your Wealth and Protecting Your Loved Ones 

Bankruptcy and estate planning are both complex areas of the law. If you have questions about either of them, it is best to speak directly with an attorney who can advise you on your specific situation. If you live in the Brandon, MS area, the team at Palmer & Slay PLLC would be happy to assist you. Please contact us today to schedule a meeting.