“Bankruptcy, Death, and Probate”

BANKRUPTCY, DEATH, AND PROBATE

In a Chapter 7 (liquidating) bankruptcy proceeding, it is often said the creditors are fighting over a corpse. On occasion, however, a person will be in the midst of a bankruptcy proceeding and suddenly pass away. The question then arises: “what happens next”? The answer is: “it depends”. If an individual is in a Chapter 7 proceeding, the case continues on, and his or her assets are liquidated by a Chapter 7 Trustee if there is equity in them over and above any liens and the debtor’s allowed claim of exemptions. (This is the property they get to keep as part of their so-called “fresh start”). If the deceased was engaged in a Chapter 13 (wage earner) proceeding, the case will likely be dismissed for lack of funding (unless the decedent was funding his/her plan through the sale of assets or something other than a steady stream of wages or other income).

If the deceased had received (or receives after their death) a bankruptcy discharge, this could be very beneficial if subsequent probate proceedings become necessary in order to transfer out certain “exempt” assets or if additional assets come into the probate estate. A discharge means that the legal liability of the deceased for most, if not all, of their debts is eliminated. In an “asset” bankruptcy estate, the creditors are given notice of the need to file a proof of claim by a certain date. If they fail to do so, their claim might very well be discharged.

If a subsequent probate proceeding becomes necessary, the Personal Representative of the deceased estate should examine the list of scheduled creditors in the bankruptcy proceeding to determine if a proof of claim was filed. If a claim was listed in the bankruptcy filing, and there were assets distributed, then the amount paid to that particular creditor would reduce the amount owed on its claim in the probate proceedings if a discharge was not entered. If the creditor was scheduled as a creditor in the bankruptcy case and failed to timely file a proof of claim, or filed a claim and was paid something on it, its claim, or the balance due on it, may very well have been discharged if an order of discharge was entered in the bankruptcy case. If so, that creditor would have no claim in the subsequent probate proceedings.

If the debtor claims certain assets as exempt (which are, in most cases, free from creditors’ claims), or other assets, such as life insurance or retirement benefits are received, his/her heirs may have the ability to keep or shelter these assets from creditors in the subsequent probate proceedings. In the extremely rare Chapter 7 case where there is a 100% distribution to creditors, this could be very important. If a creditor missed the deadline to file a claim in the bankruptcy case, and their debt has been wiped out by virtue of the bankruptcy discharge, they should not get a “second bite at the apple” as they say, and be able to file a claim in the probate proceeding.

In a Chapter 13 case, the Debtor does not get a discharge until all the required plan payments have been made. If the plan payments are based upon future wages, as most plans are, the Chapter 13 will likely “crash and burn” upon the death of the debtor, and no discharge will be entered. However, if the plan is funded by asset sales, it might be possible to have the plan completed and have the discharge entered, in which case the above principles might still apply.

If, within 180 days of the bankruptcy filing date, the debtor acquires or becomes entitled to acquire property by way of an inheritance, devise or bequest, or is the beneficiary of a life insurance policy or death benefit plan, then this property becomes part of the bankruptcy estate, to be administered by the Trustee. If the debtor becomes entitled to this type of property more than 180 days after he/she filed for bankruptcy relief, then this property is his or hers to keep. In a death situation, where more than 180 days has run from the bankruptcy filing date, such property would become part of his/her probate estate. (This could happen, for example, if the primary beneficiary has died first and there is no contingent beneficiary named or the party named is the decedent’s estate).

In this case, if the assets to be administered in the subsequent probate case are less than $23,000, then you can engage in what are called “small probate” proceedings. This is where an estate is opened, almost immediately assigned to the heirs, and then closed. If the assets total more than $23,000, then more involved probate proceedings (formal or informal) may be necessary and a notice to creditors to file claims should be published. In this instance, if a discharge in bankruptcy was entered, the only legitimate claims would include: (1) those incurred by the decedent after he/she filed for bankruptcy; (2) those creditors whose claims were somehow omitted from the list of creditors in the bankruptcy proceedings (omitted claims are not discharged); (3) those who held a claim that, by its nature, is not subject to being discharged (like child support); or (4) those who obtained a non-dischargeable judgment against the debtor (for fraud, for example).

If you have a situation where you are involved in a bankruptcy case and probate issues arise, or a probate case becomes entangled in some type of bankruptcy proceeding, the interaction between the two can become quite complex. The firm of Damon, Ver Merris, Boyko & Witte, PLC, deals in such matters on a regular basis. Don’t leave your fate to chance. Contact us at (616) 975-9951 and set up an appointment with our bankruptcy and probate specialists who can guide you through the legal maze. Call us today. – Larry A. Ver Merris / May 14, 2018