How Bankruptcy and a Probate Estate Can Overlap
More than 50,000 bankruptcy cases are filed each month in the United States. Predictably, some of those people will pass away after having filed their bankruptcy petitions and while the cases remain pending. No matter how large the estate or whether a last will and testament exists, a pending bankruptcy creates a scenario in which the estate is automatically contested.
Bankruptcy as a legal concept is a means by which a debtor discards debt and/or agrees to a plan through which he or she repays debt. Generally, the person or organization petitioning for bankruptcy cannot repay their debts and seeks a practical alternative. The purpose of bankruptcy is its economic benefit. Creditors reclaim at least some of their investment, and borrowers get a second chance. All bankruptcy cases are handled by federal courts. The various types of bankruptcy include the following:
- Chapter 7 involves the liquidation of assets.
- Chapter 11 comprises individual or organizational reorganizations.
- Chapter 13 deals with debt repayment via payment plans, lessened debt covenants and so forth.
Probate is a legal concept in which something is validated and authenticated. It’s the initial step in administering the estate of a deceased person, and it can be done with or without a will. Probates can often be long and complex, but they are not required. They are generally only needed if the estate is contested. However, if a person has died while a bankruptcy is ongoing, then the estate is contested due to the nature of that case.
Property in the Custody of a Probate Court
Marshall v. Marshall is an important case in which the U.S. Supreme Court recognized the rights of state probate courts. The ruling prevents a federal court from marshaling property of which a probate court already has custody. Since all bankruptcy cases are handled at the federal level, this means that a bankruptcy court has no right to property that a probate court is already governing.
The Bankruptcy Reform Act
The Bankruptcy Reform Act of 1978 limited the extent of the Bankruptcy Act of 1938, which was actually the fourth such act that the U.S. had passed. The reform prevents bankruptcy courts from administering the estates of descendants. This does not mean that the court does not have access to the debtor’s estate. It does limit the court’s reach, but the court could, for instance, liquidate assets that it has a right to in order to make a lender whole.
A Tale of Two Estates
How a probate estate and bankruptcy intersect is still a matter of some controversy since laws can at times seem contradictory and no ruling has clarified those discrepancies. Once a bankruptcy has been filed, you essentially have two estates in the eyes of the law. You have the bankruptcy estate, which is determined at the time of the filing, and the debtor’s estate, which includes any exempt assets as well as assets acquired post-filing.
Exemptions and Dismissal
Certain asset exemptions exist inherently. A debtor can also assert certain exemptions as part of the filing, and recognized exemptions can never be a component of the bankruptcy estate. There is also the possibility for the bankruptcy to be dismissed. While the law does allow for a Chapter 7 case, for instance, to proceed post-death, it does not mandate the case, and a judge may choose to dismiss it.
Local Representation in New Jersey
Are you considering filing for bankruptcy? Have you been affected by a company’s or an individual’s bankruptcy petition? In either case, a bankruptcy lawyer at the office of Neuner & Ventura can provide you with guidance throughout the process. Our firm focuses on bankruptcy for people and organizations in southern New Jersey, and we have more than three decades of experience in the field. Initial consultations are provided at no charge, so contact our office in Marlton, NJ, today online or by calling (856) 596-2828.