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How Can Bankruptcy Impact Estate Planning?

A lot of people put together an estate plan in preparation for their death or incapacitation. This arrangement ensures that the real estate properties, vehicles, jewelry, investments, and other possessions go to the right individuals. It’s supposed to protect your assets and loved ones, but what if you’re in bankruptcy when you die or your beneficiary is at risk of facing one?
Even if the possibility of going bankrupt seems far-fetched, you must consider how it may affect your estate plans and your family. In most cases, it’s best to work with a bankruptcy & estate planning attorney when preparing your estate plans or filing for bankruptcy. That way, you’ll be able to preserve your legacy and plan for things that could go wrong.

What happens when a person is bankrupt?

When you can no longer pay off your debts, you have the option to declare bankruptcy. To do this, you will need to file a petition under one of the nine Bankruptcy Code chapters. In most cases, a person who’s deep in debt will submit a bankruptcy petition under Chapter 7 or Chapter 13.

Chapter 7 bankruptcy

Chapter 7 of the Bankruptcy Code is also known as a straight bankruptcy or liquidation. You agree to liquidate your assets and properties to repay creditors if you file under this chapter. The court will appoint a trustee to determine an acceptable arrangement for you and the creditors.
Under this federal law, certain assets are exempt from liquidation. Some examples of this include vital properties like your home, car, household goods, clothes, pension, and even a portion of your home equity.  But to qualify for this bankruptcy petition, you’ll have to submit a means test form to show that your income is low enough.

Chapter 13 bankruptcy

Meanwhile, Bankruptcy Code Chapter 13 doesn’t require you to sell off your assets to repay creditors. Instead, applying under this federal statute will result in a court-approved plan that allows you to repay all or part of your obligations over the course of three to five years.
But before you can consider this repayment plan a feasible option, you must meet certain requirements. The amount of your debt must not exceed a certain amount, and you must earn enough money to pay the creditors.

What happens to my estate plan if I die while bankrupt?

By preparing an estate plan or creating a Last Will and Testament, you’ll be leaving instructions for your life wishes. But if you die while bankrupt, all the debts you acquired won’t go away. That means it must be settled before any of your beneficiaries receive their inheritance.
If you also filed a petition under Chapter 7 of the Bankruptcy Code before you passed away, then your case will continue as is. Your assigned trustee will pay off the creditors by selling the assets and properties. After that is settled, your beneficiaries will then receive what’s left of your assets.
However, if you happened to die while you were in the process of a Chapter 13 bankruptcy petition, your family may have to face a different scenario. Your trustee and beneficiaries will have to file a petition to the court. They may ask for a case dismissal, hardship discharge, conversion to a Chapter 7 bankruptcy plan, or a continuation to the Chapter 13 repayment plan.
Keep in mind that these courses of action are only requests made by your family to the court. The judge will have the final say on what’s the best move for all parties. If you want to protect your family and beneficiaries from this burden, you should consider consulting with an experienced estate planning attorney.

What happens to my beneficiary if they’re bankrupt when I die?

A beneficiary who’s in the middle of a bankruptcy process can also affect your estate plan. If you leave assets to them when you pass away, there’s a high chance that your properties will only end up in the hands of creditors. Even if the bankruptcy is already discharged or completed for a period, creditors may still seize certain properties.


Facing bankruptcy is a stressful time for everybody, especially since it can affect the future outcome of your estate plans. Nobody wants to leave behind the burden of debt on their loved ones, no more how big or small the amount is.
That’s why if you’re preparing your estate plans or suddenly suffer from bankruptcy, it’s best to work with a reliable bankruptcy and estate planning lawyer. They can help you navigate your case and ensure you can leave the best possible inheritance to your family when you pass away.