Continuation of Chapter 13 Postmortem: Why Courts Should Allow Deceased Debtors' Cases to Continue Post Plan Confirmation
| Citation | Vol. 37 No. 2 |
| Publication year | 2021 |
Continuation of Chapter 13 Postmortem: Why Courts Should Allow Deceased Debtors' Cases to Continue Post Plan Confirmation
Alexandra R. Byrne
A lack of direct guidance from Rule 1016 of the Federal Rules of Bankruptcy Procedure has created inconsistency among bankruptcy courts regarding whether to continue a chapter 13 case if the debtor dies post plan confirmation but before discharge. Rule 1016 allows a deceased debtor's chapter 13 case to continue if "further administration is possible" and it is "in the best interests of the parties." Although dismissal is appropriate if the debtor dies before plan confirmation, continuation after plan confirmation is possible and benefits all parties.
The benefits of continuation post plan confirmation stem from the certainty under federal bankruptcy law regarding what pre-petition creditors will receive and allows beneficiaries and post-petition creditors to have access to the decedent's assets in probate, rather than all three parties fighting over the decedent's assets in probate. Continuation of the bankruptcy case results in creditors receiving their expected distribution amount under the confirmed payment plan (through continued plan payments made by the decedent's beneficiaries) or unsecured creditors receiving at least as much as they would have received under chapter 7 (through conversion to chapter 7). A hardship discharge may also be warranted if the decedent's unsecured creditors have already received at least as much as they would have under chapter 7. Courts should permit continuation of the bankruptcy case and ultimately award a discharge if a chapter 13 debtor dies post plan confirmation because it will create uniformity among bankruptcy courts, equitable treatment among chapter 13 and chapter 7 debtors, and more certainty to both the decedent's beneficiaries and her creditors.
[Page 428]
Chapter 13 of the Bankruptcy Code provides an option for individual debtors to retain their property, restructure their finances, and repay their creditors over time.1 To qualify for chapter 13, an individual debtor must have regular annual income and debts below a threshold amount.2 This opens eligibility for chapter 13 to sole proprietorships3 and unemployed or retired individuals who have a regular source of income.4 Although a beneficial option for individual debtors, the majority of chapter 13 cases are dismissed by the bankruptcy court before the debtor receives a discharge,5 with only about one-third receiving a discharge.6 One reason for dismissal is the death of the debtor.
Courts look to Rule 1016 of the Federal Rules of Bankruptcy Procedure ("FRBP") for guidance if a chapter 13 debtor dies after filing for bankruptcy. Rule 1016, however, provides little instruction and leaves much discretion to the court to interpret its application. These interpretations vary between and within jurisdictions. "[T]he confusion rendered by the death of a chapter 13 debtor alone decries the need for reform, and at the very least greater uniformity."7 Under Rule 1016, if a chapter 13 debtor dies, "the case may be dismissed; or if further administration is possible and in the best interests of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death . . . had not occurred."8 Variations by the courts center around determining what constitutes "further administration" and what is "in the best interests of the parties." Courts consistently hold that dismissal is warranted if the debtor dies before plan confirmation.9 This is because the debtor's
[Page 429]
participation is necessary during the plan confirmation process.10 Courts, however, are very inconsistent in deciding whether to continue a case if a debtor dies after plan confirmation.11
This Comment focuses on the divergent interpretations of Rule 1016 by bankruptcy courts. These interpretations demonstrate the various ways a chapter 13 case can continue after the debtor dies. First, Section I provides background on the differences between filing under chapter 7 and chapter 13 to provide context for the differences in the application of Rule 1016. Next, Parts A and B of Section I discuss the different interpretations of what constitutes "further administration" and how to determine what is "in the best interests of the parties." Several policies underlie the varying interpretations, and they too will be examined. Section II will then examine the different ways a chapter 13 case can continue postmortem and how each option benefits debtors, creditors, and beneficiaries of the deceased debtor. This Comment concludes by contemplating policy considerations for continuing a chapter 13 case, including consistency and equitableness in comparison to the procedure followed in chapter 7 cases.
Bankruptcy courts look to Rule 1016 if a debtor dies during the pendency of her chapter 13 case. It states:
Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer's debt adjustment, or individual's debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the 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 in the same manner, so far as possible, as though the death or incompetency had not occurred.12
[Page 430]
According to the "Notes of Advisory Committee on Rules," both chapter 11 and chapter 13 cases will likely be dismissed.13
The case law involving incompetency in bankruptcy is underdeveloped.14 Because there is no federal statute that sets forth the criteria to determine incompetency, bankruptcy courts either require the state court to determine incompetency or the bankruptcy court itself applies the law of the debtor's domicile.15 "In common understanding, the term 'incompetent' refers to a person who lacks the mental competence or capacity to make decisions or conduct her own legal or business affairs."16 Rule 1004.1 applies if an incompetent debtor files for bankruptcy.17 In such cases, the personal representative of an incompetent debtor "may file a voluntary petition"18 and a representative may be appointed by the court if the debtor doesn't already have one.19
Rule 1016 also applies if the debtor becomes incompetent after filing for bankruptcy.20 In re Moss followed a two-step process to determine if the debtor's chapter 7 case could be continued.21 First, the court determined if the debtor was incompetent; in this case, incompetence had already been determined by another court.22 Second, the court determined if the case could be continued "in the same manner as if the incompetency had not occurred."23 The court reasoned that although the debtor's incompetency prevented the case from being administered "as usual,"24 the case did not need to be dismissed.25 Rather, the appointment of a limited guardian was viable and necessary to continue the case.26 The court
[Page 431]
opined that a limited guardian would protect the debtor's rights and ensure that the benefits of bankruptcy are available to debtors who become incompetent.27
Although there appear to be no published cases involving a chapter 13 debtor who becomes incompetent after filing for bankruptcy, courts are likely to follow the same procedure that In re Moss did and appoint a limited guardian to represent the incompetent debtor in the administration of her case.28 An issue may arise as to whether the incompetency restricts the debtor's access to employment and therefore affects her ability to contribute her disposable income. The court would have to evaluate whether any payments that the debtor is receiving—such as social security or other support payments—are sufficient to pay the creditors. If not, the court should conduct a similar analysis as if the debtor died, including determining if converting the case to chapter 7 is necessary to continue the administration of the case or if the debtor satisfies the hardship discharge requirements.29
Continuation of a case after the death of a debtor stems from the Bankruptcy Act of 1898.30 Section 8 of this act stated that "[t]he death . . . of a bankrupt shall not abate the proceedings but the same shall be conducted and concluded in the same manner, so far as possible, as though he had not died . . . ."31 Rule 1016 maintains the language of Section 8 on continuing the case, "as though he [the debtor] had not died" but does not specify how the chapter 13 case should continue.32 However, it does provide two parameters that can help guide courts in determining how to proceed: (1) further administration must be possible and (2) continuation must be in the best interests of the parties.33
Additionally, if the bankruptcy case continues, the decedent's probate proceedings generally can continue.34 "This stems from the fact that bankruptcy and probate jurisdictions are both fundamentally in rem."35 As such, the bankruptcy court and the probate court would administer the particular assets
[Page 432]
and address the particular claims subject to its jurisdiction if the bankruptcy case continues. This means that if a chapter 7 debtor dies before discharge, the bankruptcy court will continue to exercise jurisdiction over the assets and claims that are part of the bankruptcy estate while the probate court will have jurisdiction over post-petition assets and exempt property not included in the bankruptcy estate.36 The property of the bankruptcy estate will continue to be liquidated and distributed among the remaining creditors.37 In chapter 13, property of the bankruptcy estate will...
To continue reading
Request your trial