Estate Executors & Bankruptcy

By Heather Frances J.D.

While you are alive, you may be able to wipe away some debts by filing for bankruptcy, but the same is not true after you die. Though a case pending at the time of your death can be allowed to continue, your executor cannot start a new case on your behalf. He can, however, start a new case on his own behalf if he is also a beneficiary of your estate.

Changes at Death

Assets you own at the time of your death become an “estate” to be managed by your executor throughout the probate process. Your executor distributes assets to your beneficiaries if you have anything left at the end of probate, but he has to pay your creditors first. If you file for Chapter 7 bankruptcy before your death, your Chapter 7 bankruptcy continues as if you were still alive. However, the bankruptcy court will likely dismiss a pending Chapter 13 case though it could be allowed to continue under rare circumstances. Your executor may represent your estate’s interests in an ongoing bankruptcy proceeding since you aren’t able to represent yourself, or the bankruptcy court can appoint someone else as a representative for your bankruptcy case.

New Bankruptcy Cases

While your executor can continue an existing bankruptcy case, he cannot start a new case on your behalf or on behalf of your estate. However, probate cases often have an effect similar to bankruptcy cases when it comes to settling debts. For example, if you die owing more than you own, your executor must liquidate your assets and pay your debts according to the procedures established by your state’s laws. As in bankruptcy, debts remaining after your assets run out are written off. Neither your executor nor your beneficiaries are personally responsible for paying your debts.

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Saving Property from Foreclosure

Though your estate cannot file for bankruptcy, your executor can file in his individual capacity if he is also a beneficiary and otherwise qualifies under the bankruptcy rules. This ability is particularly handy if he stands to inherit a particular piece of property from your estate and the property is facing foreclosure. Since beneficiaries have the ability to file bankruptcy as a way to prevent foreclosure, your beneficiaries could keep the property with the help of a bankruptcy case. Without bankruptcy, your creditor could proceed with the foreclosure, causing your beneficiaries to lose the property.

Beneficiaries in Bankruptcy

Your executor can serve as your estate’s representative even if he has previously filed for bankruptcy on his own behalf, and this previous bankruptcy does not typically affect his ability to serve as executor. However, your executor’s bankruptcy – whether filed before or after your death – could affect your estate if he is a beneficiary. In such a case and depending on your court’s interpretation of existing laws, the automatic stay, or postponement, of collection actions that your executor receives by filing for bankruptcy may also apply to the assets in your estate.

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References

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