Bankruptcy & Probate
Probate occurs when a court rules on disputes in a deceased person's will or lack of one. This process may be required in the transference of a decedent's sole ownership of valuable assets--land titles, stocks or bonds, or bank savings and loan accounts--to his rightful beneficiaries. Probate also can be used to collect debts owed to the deceased person. Federal judges sometimes supervise probates, which are subject to state laws, if the assets involved are also involved in a bankruptcy dispute.
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Bankruptcy
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Federal courts determine all bankruptcy cases.
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Individuals overburdened by debt sometimes choose to get a fresh start by claiming bankruptcy. Chapter 7 of the Bankruptcy Code liquidates all non-exempt property. Exempt property includes items needed for survival or work, such as household appliances, pensions and tools of the debtor's trade. After distribution of liquidated funds, the debtor becomes legally free of all debt.
Chapter 13 tries to rehabilitate the debtor. A court-appointed trustee apportions the debtor's disposable income into a repayment plan that lasts about three years. For Chapter 13 to be a viable option, creditors must expect to receive as much money as they would have if the debtor had liquidated all of his non-exempt property. Filing for Chapter 13 exempts the debtor from having to clear debts that would have become invalid under Chapter 7.
Although not as common, individuals also may file for bankruptcy under Chapter 11, a reorganization and rehabilitation plan. Debtors submit a reorganization plan that is either accepted or rejected by creditors and other interested parties.
Warning
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A family cannot use probate to avoid paying off the decedent's remaining debt. According to a 2000 article in the "Real Property, Probate and Trust Journal," debtors must file for bankruptcy prior to death if they want to save their loved ones from dealing with their financial woes.
To be eligible to file for Chapter 13 or 11, a debtor also must be eligible to file for Chapter 7, meaning that within 180 days of petitioning, the debtor must have received counseling from an approved credit counseling agency and must not have had a prior bankruptcy claim rejected.
Considerations
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Filing for bankruptcy might save your loved ones from more grief.
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Bankruptcy Rule 1016 states "death or incompetency of the debtor shall not abate a liquidation case under Chapter 7 of the Code." Chapter 11 or 13 claims may be dismissed in the event of a death. However, if it is possible to continue the process and the continuation benefits all parties, the case may proceed as though no death or incompetency had occurred.
Modifying a Will
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Some individuals have attempted to use a codicil, which modifies all or part of a will, to escape having their probate estate sucked into a bankruptcy claim.
Disclaim an Inheritance
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Some people decide to disclaim their inheritance rather than have it go to creditors.
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Many states permit beneficiaries and heirs to disclaim their inheritance to avoid taxes and other implications involved in receiving property. State law generally requires a written disclaimer within a certain time frame after the decedent's death. A beneficiary may be unable to disclaim his inheritance if he accepted any benefit or control over the disclaimed property. But some states do not allow individuals to disclaim a property if they are unable to pay their own debts.
Historically, debtors may disclaim their inheritance prior to filing for bankruptcy, according to the "Real Property, Probate and Trust Journal." They may not disclaim their inheritance after filing for bankruptcy because at that point, their assets are put under the control of a court-appointed trustee.
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