DOES DEBTOR’S DEATH AFFECT BANKRUPTCY?

Let’s say you file a bankruptcy today, then, two weeks from now, you die. What happens to your bankruptcy? Two clients of mine this year died on me after their cases were filed. The first client died on the day after we filed her Chapter 7 case. The second client died two weeks after we filed his joint Chapter 7 case. In a Chapter 7 case, the trustee is required to continue the case to discharge. However, in a Chapter 13 case, the death of the debtor poses a different set of legal problems, because unlike a Chapter 7 case liquidation, a Chapter 13 case involves a reorganization of the financial affairs of the debtor.

 The first thing that must be done is to notify the trustee, and other parties in interest promptly of debtor’s death. In Re Vetter, the Chapter 13 debtor died less than one month after the plan was confirmed. This is what happens when the plan payment is much more than what the debtor can bear. Sometimes this is referred to as death by Chapter 13. On November 17, 2011, a representative of the debtor’s probate estate, with the assistance of the debtor’s counsel, filed a notice of conversion from Chapter 13 to Chapter 7. The US Trustee subsequently learned of the debtor’s death. “Although the debtor died during the Chapter 13 portion of the case following confirmation of the debtor’s plan, the debtor’s counsel made no request to the Court for the debtor’s duties personal probate estate representative to assume debtor’s duties under the Bankruptcy Code. So, this is the second thing that must be done. It further appears that creditors, the Chapter 13 trustee, and other parties in interest were not provided notice of the debtor’s death. The only suggestion that the debtor died is the purported signature on the notice of conversion by an individual indentified as the debtor’s probate estate representative,” the court said. The UST moved to dismiss the Chapter 7 case for cause on the basis that there was no authority to convert the case to Chapter 7, and that the deceased debtor was not eligible for Chapter 7 relief.

The bankruptcy court granted the UST’s motion to dismiss. “Rules 1016 and 1017(f) do not permit the debtor’s Chapter 13 case to be converted to one under Chapter 7 under the facts of this case. The Court, the case trustee, and other parties in interest should be promptly notified of the death of a debtor under bankruptcy protection, particularly where relief is sought under a reorganization chapter. Under Chapter 13 the case is subject to dismissal under Rule 1016 following the death of a debtor if further administration is not possible and allowing the case to continue does not serve the best interests of creditors and the bankruptcy estate. The failure to provide such notification in the present case prevented a proper evaluation of this case. Further, the failure to obtain permission from the Court to permit the debtor’s probate estate representative to act for the debtor casts serious doubt upon the authority of counsel to take instruction from the representative,” the court said. “The Court recognizes that a Chapter 7 or Chapter 13 case could be at the stage where notice of the debtor’s death and recognition of the authority of a personal representative would be less important than in this case. However, in most cases, pleadings, amended schedules, reports, or an amended plan may be required. Parties in interest may well have service of process questions. For instance, do you serve the debtor with summons and complaint on adversarial proceeding by taping the documents to his tombstone with duct tape? Or, should his coffin be unearthed, opened and the documents placed on top of his skull or chest cavity? These are the legal questions that must be analyzed. Creditors and parties in interest may need to reevaluate their positions whether to prosecute a motion for stay relief or dischargeability action in the cemetery instead of bankruptcy court.

 Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.