The Lawletter Vol. 48 No. 1
It is not uncommon for a debtor who filed a Chapter 11 or 13 bankruptcy case to die or become incapacitated during the life of the bankruptcy proceeding. Under Fed. R. Bankr. P. 1016:
If a reorganization, family farmer's debt adjustment, or individual's debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.
Interestingly, the rule is different where the debtor filed under Chapter 7. The death or incompetency of the debtor "shall not abate a liquidation case under chapter 7 of the Code." This is because the death of the debtor has no practical effect on the administration of a Chapter 7 which is in the hands of the Chapter 7 Trustee. See Hawkins v. Eads, 135 B.R. 380 (Bankr. E.D. Cal. 1991). To avoid having a reorganization case dismissed upon the death of the debtor, an interested party must show that further administration of the case is in the best interest of the parties. The decision to proceed with the reorganization is entirely within the bankruptcy court's discretion. In re Querner, 7 F.3d 1199 (5th Cir. 1993). Most courts hold that in the Chapter 13 proceeding, if the debtor dies or becomes incapacitated after the Chapter 13 plan is confirmed, the case will not be dismissed but will proceed to its conclusion. See In re Perkins, 381 B.R. 530 (Bankr. S.D. Ill. 2007). The Rule does not preclude further administration where the Chapter 13 plan has not been confirmed prior to death, and it is possible under certain circumstances for the court to confirm a plan after the death of the debtor. In re Terry, 543 B.R. 173 (E.D. Pa. 2015).
In addition to seeking further administration, the deceased debtor's representative may seek a hardship discharge in a pending Chapter 13 case upon the death of the debtor. In In re Hoover, No. 09-71464, 2015 Bankr. LEXIS 924 (N.D. Cal. Mar. 24, 2015), the court held that the debtor need not be held accountable for his untimely death where the debtor died with just one payment left under his Chapter 13 plan. The court ordered a hardship discharge under 11 U.S.C. § 1328(b). See also In re Inyard, 532 B.R. 364 (Bankr. D. Kan. 2015).
Importantly, if a potential debtor dies prior to filing for bankruptcy protection, bankruptcy is not an option. A decedent's estate cannot be a debtor, and any attempt to seek protection under the Bankruptcy Code by the estate will be dismissed.