Naperville Estate Planning Lawyer on How Filing for Bankruptcy Can Affect Estate Plans
When debts become overwhelming, a person may have no other choice but to file for bankruptcy. Through bankruptcy, an individual may find relief from crushing debts and enjoy a fresh start. However, bankruptcy may also have an effect on estate plans. If you are struggling financially and are considering filing for bankruptcy protection, you might also be wondering what will happen if you were to die while you are in bankruptcy. You may wonder, “What happens if a person passes away while he or she is in bankruptcy?” As an experienced estate planning lawyer, I can help you understand how bankruptcy may impact your estate plans and provide personalized legal guidance regarding all of your estate planning concerns.
Debts Must Be Paid Before Beneficiaries Can Receive Their Inheritance
If you have already created a last will and testament, you have already taken more estate planning action then most Americans. Although creating a will is essential regardless of wealth, many people procrastinate this important step until it is too late. Unfortunately, if you are in the midst of bankruptcy when you pass away, it is possible that your heirs will not receive the full inheritance that you have assigned them in your will. Before beneficiaries receive their inheritance, the deceased person’s debts must be paid off. This means that beneficiaries will only receive the portion of your estate that is left over after your bankruptcy case closes.
Options When a Person Dies During Bankruptcy
Most people file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. In Chapter 7 bankruptcy, the filer’s assets are usually liquidated while his or her eligible debts are discharged. Because Chapter 7 bankruptcies do not require a significant amount of direct involvement from the person who filed, the case will likely proceed normally even if you pass away.
In Chapter 13 bankruptcy, by comparison, the filer must come up with a plan for paying off most of his or her obligations. By filing for Chapter 13 bankruptcy, you will likely enter into a repayment plan that lasts from three to five years. If you pass away while making these payments, the bankruptcy trustee and the executor of your estate have several options including:
- Requesting that the bankruptcy case be dismissed so that creditors can pursue repayment in probate
- Petitioning the court for a hardship discharge which cancels the debt obligation
- Requesting that the case be converted into a Chapter 7 bankruptcy so that the estate can be liquidated in order to pay debts or
- Continuing the repayment plan
Protecting Your Assets From Future Creditors
If you are interested in creating an estate plan and you want to ensure your assets are protected from creditors, you may want to consider drafting an irrevocable trust. An irrevocable trust allows you to transfer ownership of your property to the trust so that it can be distributed to beneficiaries upon your death. Once you create an irrevocable trust, you no longer legally own the property contained in that trust. This means that creditors cannot confiscate this property and therefore block your beneficiaries from inheriting it. However, it is important to start asset protection planning before you are the subject of possible liability. If the court has reason to believe that a transfer was made to defraud creditors, the trust may be nullified.
Contact a Naperville Estate Planning Lawyer
Everyone should create an estate plan, regardless of their financial situation. To discuss what types of estate planning tools are best suited for your unique situation, contact The Gierach Law Firm. Schedule a confidential consultation with a knowledgeable DuPage County estate planning attorney by calling our office at 630-756-1160 today.