Cite as: Keith M. Lundin, Lundin On Chapter 13, § 10.8, at ¶ ____, LundinOnChapter13.com (last visited __________).
This section deals with the eligibility of an individual who dies before the filing of a Chapter 13 petition or after the petition but before confirmation of a plan. The related issues that arise when a Chapter 13 debtor dies after confirmation are discussed elsewhere.1
The estate of a deceased individual is not an individual with regular income and is not eligible for Chapter 13.2 “Individual” is not separately defined by the Bankruptcy Code. “Person” is defined in 11 U.S.C. § 101(41): “‘person’ includes individual, partnership and corporation.” In 11 U.S.C. § 101(15), the broader term “entity” is defined to include “person, estate, trust.” Because “individual” is a defined subset of “person” and because “person” and “estate” are separately identified as subsets of “entity,” it follows that “individual” and “estate” are mutually exclusive concepts under the Bankruptcy Code. Not all “entities” are eligible for Chapter 13—only “individuals.” An “estate” is not among the entities eligible for Chapter 13. The personal representative of a decedent’s estate, if an individual with regular income, may be eligible for Chapter 13 notwithstanding that the estate itself is not.3
Filing a Chapter 13 petition for an individual who has already died, or for a decedent’s estate, is an iffy strategy likely to get someone in trouble. Hiding the fact that the debtor is not a living person is the worst strategy. The estate’s only argument for staying in the Chapter 13 case is lame: because eligibility is not jurisdictional,4 the decedent’s estate becomes “eligible” if no one raises the issue before confirmation. Planning for the trustee (and all creditors) to overlook the fact that the debtor is already dead is a really bad idea. There is always a trustee in a Chapter 13 case5 and you can be sure the trustee will figure out that the debtor is not an individual—if not before, certainly at the meeting of creditors6 when there is no debtor to question under oath. On the inevitable trustee’s motion to dismiss, debtor’s counsel may be called upon to explain why sanctions are not appropriate for a filing for an obviously ineligible entity.
The ground shifts when the individual was alive at the filing of the petition but passes away before confirmation of a plan.7 Arguably, eligibility is determined at the petition and the individual alive at the petition was eligible to be a Chapter 13 debtor.8 When that individual debtor dies after the petition but before confirmation, continuation of the Chapter 13 case is not a question of statutory eligibility under § 109(e); it is instead a question of continued administration controlled by Bankruptcy Rule 1016.
Bankruptcy Rule 1016 provides that if a Chapter 13 debtor dies while the case is pending, “the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and may be concluded in the same manner, so far as possible, as though the death . . . had not occurred.” This rule contemplates a case-by-case review in which the bankruptcy court should assess whether it is possible and desirable to proceed with the Chapter 13 case after the death of the debtor.9
One court of appeals has validated a bankruptcy court’s decision to confirm a Chapter 13 plan for a debtor who died after filing but before confirmation. In Querner v. Querner (In re Querner),10 the Chapter 13 case was filed by the debtor’s daughter, who was also the debtor’s legal guardian. Although the reported facts are not altogether clear, the case was filed in March of 1989, the debtor passed away, and in January of 1990, the bankruptcy court confirmed a Chapter 13 plan. The Fifth Circuit held that the bankruptcy court appropriately exercised its discretion under Bankruptcy Rule 1016 to continue administration of the Chapter 13 case after the debtor’s death.
In September of 1990, the debtor’s plan was completed and the Chapter 13 case was closed. After the case was closed, the bankruptcy court continued its jurisdiction over the estate of the deceased debtor to resolve a conflict between co-executors of the probate estate. The Fifth Circuit disapproved of the exercise of bankruptcy court jurisdiction over the probate estate of the deceased debtor after the closing of the Chapter 13 case.
Querner stands for the proposition that the legal guardian of a debtor can commence a Chapter 13 case on behalf of the ward11 and that it is within the bankruptcy court’s discretion under Bankruptcy Rule 1016 to continue administration and confirm a plan after the death of the debtor. However, the bankruptcy court is not the right court, and Chapter 13 is not the appropriate vehicle, to resolve disputes over the probate estate of a deceased Chapter 13 debtor.12
Querner is the rare case in which a Chapter 13 plan has been confirmed for a debtor who died after filing but before confirmation. Querner is all the more unusual because consummation of the plan was apparently accomplished by the debtor’s legal guardian and the Chapter 13 trustee after the debtor’s death.
In In re Seitz,13 one spouse in a joint case passed away after the petition but before the § 341 meeting of creditors. The surviving spouse had been appointed personal representative of the decedent’s estate. Exploring Texas law, the bankruptcy court found that the surviving spouse had statutory authority to speak for the decedent with respect to the assets and liabilities of the probate estate and that was good enough to satisfy the requirement in § 34314 that the (decedent) debtor appear under oath at a meeting of creditors.
Two things interesting about Seitz. The bankruptcy court looked to Texas law to determine whether the surviving spouse could continue administration of the Chapter 13 case for purposes of Bankruptcy Rule 1016. Would the same choice-of-law protocol apply to filing the petition in the first instance? In other words, if the powers granted by a state court to the executor, administrator or “next of kin” specifically included authority to file bankruptcy, would the petition for an already deceased individual survive an eligibility challenge?
Notice also that Seitz was not an eligibility case, even though the issue of the surviving spouse’s authority arose before the meeting of creditors and long before confirmation. The feasibility of further administration under Bankruptcy Rule 1016 has very different content than eligibility analysis under Code § 109(e). Facts were important in Seitz—the extent to which the surviving spouse had complied with Texas probate law to qualify as representative of the deceased debtor was probably outcome determinative. Other courts have been less receptive to the idea that a representative authorized by state law to administer a probate estate can perform bankruptcy functions for a deceased debtor.15
A surviving spouse has been permitted to continue a Chapter 13 case when one debtor died after confirmation.16Several courts have discussed and some have permitted the entry of a hardship discharge when the debtor dies after confirmation and before completion of payments under the plan.17
A surviving spouse who is personally liable for debts of the decedent may find Chapter 13 to be an effective technique for managing that liability, notwithstanding that the decedent’s estate itself is not eligible. In In re Estrada,18 the surviving spouse in a jointly filed Chapter 7 case was permitted to convert to Chapter 13 to manage life insurance proceeds that came to her when her husband died during the Chapter 7 case. The life insurance proceeds in Estrada were not part of the deceased husband’s estate. Because substantive consolidation was never ordered during the Chapter 7 case, the surviving spouse could convert her separate (though jointly filed) case to Chapter 13 and segregate her assets from those of her deceased husband. In contrast, in In re Spiser,19 when both debtors in a joint Chapter 13 case died before confirmation, the bankruptcy court concluded the case could not be converted to Chapter 7 and the lack of an eligible individual required dismissal of the Chapter 13 case.20
There may be incentives for heirs of a deceased Chapter 13 debtor to seek continued administration of the case under Chapter 13 rather than under state probate law. For example, if it is possible to complete payments under the plan notwithstanding the death of the debtor, the debtor may be entitled to a discharge of all of the debts provided for by the plan.21 Assets that might otherwise have to be liquidated under state law to pay the debtor’s (decedent’s) debts might not have to be liquidated. This could be a substantial benefit to the debtor’s heirs and family. However, as the Fifth Circuit noted in Querner, although the bankruptcy court has discretion to continue administration of a Chapter 13 case after the death of the debtor, it is inappropriate to do so when the Chapter 13 case is completed and the only disputes remaining are within the special expertise of a state probate court.22
2 See In re Estate of Roberts, No. 05-26653 ESD, 2005 WL 3108224 (Bankr. D. Md. Aug. 15, 2005) (unpublished) (Derby) (Estate of deceased is not “person” eligible for Chapter 13 relief.); In re Jarrett, 19 B.R. 413 (Bankr. M.D.N.C. Apr. 13, 1982) (Reynolds).
3 See Bunch v. Hopkins Sav. Bank (In re Bunch), 249 B.R. 667, 668 (Bankr. D. Md. May 30, 2000) (Schneider) (“[W]hile a decedent’s estate is not eligible to file a Chapter 13 bankruptcy petition because it is not within the definition of an ‘individual’ as set forth in 11 U.S.C. § 109 for purposes of Chapter 13, a debtor who is serving as a personal representative of a decedent’s estate is not thereby barred from filing a Chapter 13 petition in his individual capacity.”).
7 Death of the debtor (or incompetency) after confirmation is discussed in § 128.1 Death or Incompetency of Debtor.
8 See § 9.1 Summary of Eligibility Requirements, § 9.2 Prefiling Eligibility Planning, § 9.3 How to Challenge Eligibility, § 9.4 Burden of Proof in an Eligibility Dispute, § 9.5 Consequences of Ineligibility: Jurisdiction; Automatic Stay; Strike, Dismiss or Excuse? and § 10.1 Debtor Must Be an Individual; Spouses Allowed.
9 See In re Alvarez Diaz, No. 03-04398 SEK, 2006 WL 3898315 (Bankr. D.P.R. July 5, 2006) (unpublished) (DeJesus) (Applying Bankruptcy Rule 1016, lack of regular income and unlikelihood that any funds would be available for distribution are cause for dismissal after debtor’s death.).
10 7 F.3d 1199 (5th Cir. Nov. 26, 1993) (Sneed, Garza, Jolly).
12 Compare In re Kjellsen, 155 B.R. 1013 (Bankr. D.S.D. June 23, 1993) (Ecker) (Bankruptcy court refused to dismiss a Chapter 13 petition signed by an incompetent debtor and by the debtor’s daughter, who was acting under a durable power of attorney, notwithstanding pending state court litigation in which the daughter’s power of attorney was partially revoked and in which a separate, competing guardian was disputing the authority of the debtor’s daughter.), rev’d, 53 F.3d 944, 946 (8th Cir. May 12, 1995) (Bowman, Wollman, Arnold) (“We agree with the District Court that [the debtor’s daughter] lacked authority to file the petition on [the debtor’s] behalf. In general, state law determines who has the authority to file a bankruptcy petition on behalf of another. . . . It is undisputed that under South Dakota law in effect at the time of the petition’s filing, the guardian of [the debtor’s] estate had exclusive control over her property. . . . As bankruptcy proceedings concern the disposition of property, . . . and as [the guardian] had exclusive control over [the debtor’s] property, [the debtor’s daughter] and [the debtor] necessarily lacked authority to file the bankruptcy petition.”).
13 430 B.R. 761 (Bankr. N.D. Tex. Apr. 8, 2010) (Hale).
14 11 U.S.C. § 343, discussed in § 43.3 Personal Appearance by Debtor.
15 See § 128.1 Death or Incompetency of Debtor. See, e.g., In re Shepherd, 490 B.R. 338 (Bankr. N.D. Ind. Mar. 28, 2013) (Grant) (On death of debtor, probate estate representative could not be substituted as petitioner to modify or complete plan; no statute or rule authorizes substitution. Bankruptcy Rule 1016 provides that dismissal is not necessarily required on debtor’s death, but it does not provide for substitution of probate representative. Probate estate cannot file bankruptcy directly and is not permitted to do so indirectly by substitution.).
16 See § 128.1 Death or Incompetency of Debtor. See, e.g., In re Fuller, No. 05-18831 HRT, 2010 WL 1463150 (Bankr. D. Colo. Mar. 11, 2010) (Tallman) (When one joint debtor died but case administration was allowed to continue and surviving debtor completed payments, deceased debtor is entitled to a discharge.); In re McNealy, 31 B.R 932 (Bankr. S.D. Ohio July 29, 1983) (Anderson). See also Bernstein v. Pavich (In re Pavich), 191 B.R. 838 (Bankr. E.D. Cal. Jan. 2, 1996) (Russell) (In a Chapter 13 case filed in 1992, in which the debtor died in 1994, adversary proceeding goes forward to determine priority of liens and homestead exemption. Homestead exemption survives death of debtor, but IRS lien attaches to exempt proceeds from sale of homestead. Surviving nondebtor spouse is entitled to half of proceeds, subject to the liens of joint creditors.).
17 See § 128.1 Death or Incompetency of Debtor. See, e.g., In re Rivera-Torres, No. 06-1997CCC, 2007 WL 626045 (D.P.R. Feb. 23, 2007) (unpublished) (Cerezo) (Vacating dismissal of case, hearing ordered on motion for hardship discharge filed by attorney for deceased debtor.); In re Bevelot, No. 05-36051, 2007 WL 4191926, at *1 (Bankr. S.D. Ill. Nov. 21, 2007) (unpublished) (Altenberger) (Hardship discharge granted to deceased debtor. Bankruptcy Rule 1016 permits case to continue after death of debtor, including possibility of hardship discharge. “Since a hardship discharge is available as a conclusion to a Chapter 13 case when death has not occurred, then it is available in a case where the debtor is deceased.”); In re Graham, 63 B.R. 95 (Bankr. E.D. Pa. July 24, 1986) (Goldhaber); In re Bond, 36 B.R. 49 (Bankr. E.D.N.C. Jan. 6, 1984) (Small); In re McNealy, 31 B.R. 932 (Bankr. S.D. Ohio July 29, 1983) (Anderson). See also § 160.5 Modification Is Not Practicable for discussion of hardship discharge when the debtor dies before completion of payments.
18 224 B.R. 132 (Bankr. S.D. Cal. Aug. 24, 1998) (Adler).
19 232 B.R. 669 (Bankr. N.D. Tex. Apr. 2, 1999) (Akard).
20 In re Spiser, 232 B.R. at 673–74 (“Only an individual with regular income may be a debtor in Chapter 13, § 109(e). With the deaths of both Mr. and Mrs. Spiser, there was no ‘individual’ remaining in the Chapter 13 case; only the probate estates of Mr. and Mrs. Spiser remained. A probate estate is not a ‘debtor’ eligible to convert the case to Chapter 7 under § 1307(a). . . . [C]onversion to Chapter 7 by a debtor’s probate estate is not permitted. . . . Only a debtor can file a Chapter 13 plan. § 1321. . . . [T]heir estates, not being an ‘individual’ and, thus, not a ‘debtor’ in Chapter 13, cannot file a final plan. . . . The estates of these Debtors would have neither future earnings nor future income. Rule 1016 provides that upon the death of the debtor a chapter 13 case may be dismissed or, if further administration is possible and ‘in the best interest of the parties,’ the case may proceed and be concluded. Because the debtors are unable to fund a plan, further administration is not possible in this case.”). Accord In re Hancock, No. 08-11867-R, 2009 WL 2461167 (Bankr. N.D. Okla. Aug. 10, 2009) (unpublished) (Rasure) (When debtor died after Chapter 13 petition, conversion to Chapter 7 was denied and case was dismissed because further administration was not in best interests of all parties.).
21 See § 128.1 Death or Incompetency of Debtor. See, e.g., In re Fuller, No. 05-18831 HRT, 2010 WL 1463150 (Bankr. D. Colo. Mar. 11, 2010) (unpublished) (Tallman) (When one joint debtor died but case administration was allowed to continue and surviving debtor completed payments, deceased debtor is entitled to a discharge.). But see White v. Glennville Bank (In re White), No. 06-60363, 2011 WL 3426166 (Bankr. S.D. Ga. May 16, 2011) (Dalis) (Although plan had been completed, discharge was not available when debtor died without completing instructional course concerning personal financial management.).
22 See also In re Spiser, 232 B.R. 669, 674 (Bankr. N.D. Tex. Apr. 2, 1999) (Akard) (When both debtors died before confirmation, Chapter 13 case is dismissed rather than converted to Chapter 7. “[I]t appears that it would be in the best interest of the creditors for the case to be dismissed so that the Texas probate court can administer the estates.”).