Bankruptcy, Taxes and Debt are Certain Even after Death

Many of us are familiar with the old adage “nothing is certain but death and taxes.” Well, how familiar are we with these certainties relative to a bankruptcy filing? For example, is your estate required to pay a tax debt after you die before completing a bankruptcy agreement? Are you liable for the tax debt of a deceased spouse if you have filed for bankruptcy?

Experiencing the death of a spouse is devastating. Compounding this stressful time is dealing with a spouse’s death before a bankruptcy proceeding closes. Fortunately, the Bankruptcy Code addresses this issue regarding a debt holder.

The process typically depends on the type of bankruptcy filed before the death. If you and your spouse filed a Chapter 7 bankruptcy, death or becoming incompetent will not change the proceedings. With a Chapter 13, the case could either be dismissed or resolved in the best interest of all parties. The bankruptcy court allows a Chapter 7 case to continue after death or some type of incapacitation. The trustee, a person assigned to administer the estate on behalf of unsecured creditors, can continue to make payments from the deceased person’s assets.

The outcome is slightly different for a Chapter 13 bankruptcy where the debtor’s finances are reorganized to manage the debts. If the case is not dismissed and further administration is possible, the case proceeds as if the debtor is still alive or competent.

Liability for your spouse’s debts usually depends on where you live. Generally, states follow either community property or common law practices. Common law states, like Missouri, hold the spouse who incurs the debt responsible. You are not liable for your spouse’s credit card debt if you name is not on the account.

While the court might dismiss a Chapter 13 bankruptcy case, you could pursue another option for handling your spouse’s debt. Some state laws allow a hardship discharge of the debt. The difference is you can avoid being harassed by creditors who attempt to collect on your spouse’s debt.

Bankruptcy laws are broad and cover many different circumstances. This includes death and having a clear understanding of the process can reduce the level of stress you endure. Contact a bankruptcy attorney today to discuss your options.