Wednesday, July 22, 2009

What Happens When the Deceased Had Filed for Bankruptcy?

Bankruptcy is pretty common these days, given the current state of our economy. Most people are aware that a person who had sought protection from the Bankruptcy Courts is generally not subject to suit in any other court while the bankruptcy case is active. Using an overly simplified generalization (which has a number of exceptions), the Bankruptcy Court has exclusive jurisdiction over most matters affecting the debtor and his property. Death of the debtor does not, perhaps surprisingly, automatically result in discharge or dismissal of the bankruptcy case.

Probate Courts also have exclusive jurisdiction over matters affecting a deceased’s estate (property) in most circumstances. So, what happens when the debtor in bankruptcy dies while his bankruptcy case is pending? Which court should have control over the deceased’s property?

The matter is complex. First, the Probate Court will have jurisdiction to admit the deceased’s will to probate and appoint any executors, trustees or other fiduciaries named under the will. If the debtor dies without a will (intestate), the Probate Court has the ability to appoint an administrator to handle the deceased’s estate. Essentially, the Bankruptcy Court has no jurisdiction to determine the validity of the deceased’s will or make decisions about administration of the probate estate. However, it may be prudent to file a motion to lift the “automatic stay” imposed by the Bankruptcy Code to seek permission to initiate probate proceedings.

A second concern is determining which court controls the deceased’s property. Most cases interpreting the Texas Probate Code and the U.S. Bankruptcy Code have determined that “exempt property” – in other words, property that would be exempt from execution to collect a civil judgment under Texas law – is within the jurisdiction of the Probate Court and can be administered by the estate’s executor without interference from the Bankruptcy Court. Similarly, any property that has been abandoned by the Bankruptcy trustee would be within the control of the probate estate.

“Non-exempt property” – in other words, property that would otherwise be subject to execution to satisfy a civil judgment under Texas law – remains within the control of the Bankruptcy Court.

Additionally, the executor of the probate estate does not automatically step into the debtor’s shoes. The Bankruptcy Court will look to its own rules (in particular, Bankruptcy Rule 1016) to decide how to proceed if the debtor has died while the case is pending. The Bankruptcy Court may decide to appoint a trustee, convert the case to another type of bankruptcy, or dismiss the case entirely.

These matters are complex. If the deceased was involved in bankruptcy proceedings prior to his or her death, you should take the precaution of advising the debtor’s bankruptcy counsel, as well as seeking advice from a probate attorney, to determine the best way to proceed with handling the deceased’s property.