estate planning to relieve the family of stress

Filing For Bankruptcy Right Before Death And Filing Bankruptcy For An Estate

Not everyone in this world dies debt-free. It would be nice if that could happen, but more often than not, people die and leave large, looming debts. The big problem here is that these debts are often attached to property that is promised in a will to an heir. So, what can you do about that? There are two ways to address this problem using bankruptcy laws and filings, but they can be somewhat complicated. 

When Someone Is Not Yet Deceased

If the debtor is not yet deceased, the debtor can still file for a Chapter 7 bankruptcy. This type of bankruptcy eliminates almost all of the debt held by the individual. It also releases the responsibility of the debt from those who inherit property from the estate.

As long as the person is still alive and the paperwork has been filed by a lawyer, the person filing for bankruptcy does not have to live or survive until the hearing. It is better if he/she does live past the hearing, but most courts view this special situation as one that would have resulted in discharge of debts anyway, had the individual been alive. Additionally, if the individual was filing bankruptcy jointly with a spouse and the spouse survives, then the spouse can appear on behalf of the deceased.

When the Debtor Is Recently Deceased

Will or no will, a person's property and assets become their own entity upon a person's death. Creditors will file claims against the estate, which could result in heirs losing some or all of their inheritance. There is only one possible saving grace, and it does NOT come in the form of a post-mortem bankruptcy. The government considers the deceased as a "non-individual," which means no bankruptcy paperwork can be filed in his/her name after he/she has already passed.

Instead, the executor of the estate may be able to file a bankruptcy in his/her own name. Anything of a physical nature any heir stands to inherit can fall under a Chapter 13 bankruptcy in his/her name. Unfortunately, there are a few complications with this procedure. 

They include: 

  • A previous filing for bankruptcy in the last seven years. If an heir already has a bankruptcy discharge on file within the last seven years, another bankruptcy to save his/her inheritance is not allowed.
  • Liquid assets, such as cash money, cannot be saved because the government expects that the money will be used to pay creditors. Any heir that was promised cash money as part of his/her inheritance can neither receive it nor save it through bankruptcy.
  • Debts exceed the assets of the estate and the courts see fit to pay off the claims of the creditors by liquidating all assets. Then a Chapter 13 would be rendered null and void.

Each state has its own bankruptcy rules to follow as well. A bankruptcy attorney in your city and state can provide locally relevant bankruptcy attorney services

Alternatives to This Conundrum

Heirs cannot be held liable for the deceased's death. Given that fact, your mother, father, grandparent, etc., can do one of two things prior to their death. They can give you your full inheritance while they are still alive. This also includes a complete transfer of physical property (e.g., homes, cars, boats, etc.).

The other option is to set up your inheritance as a living trust, which is an irrevocable document giving you your inheritance while the person is still alive. The only difference between these two actions is that one requires a lawyer to create the living trust, while the other hands off inheritances without documentation. Whatever remains undistributed upon the person's death is then liquidated to pay debts.