How the death of a debtor affects a bankruptcy case is described in Rule 1016 of the Federal Rules of Bankruptcy Procedure. The result is different depending on whether the case was filed under Chapter 13 or Chapter 7 of the Bankruptcy Code. In a Chapter 7 case, the bankruptcy continues. The estate is administered and the case eventually closed as if the death of the debtor never happened. The reason this is possible is because after the bankruptcy case is filed all property belonging to the debtor now belongs to the bankruptcy estate. The trustee doesn’t need the debtor’s involvement or participation in the process. If all assets listed in the schedules are exempt, then the trustee will close the case without liquidating any assets and the debts will be discharged. With the debts discharged the debtor’s heirs can receive the debtor’s exempt property without worrying about claims being filed by the creditors.
Chapter 13 bankruptcy cases usually cannot proceed after the debtor dies but whether to dismiss the case is at the court’s discretion. Chapter 13 cases require a payment be made to a trustee each month. The trustee takes these payments and pays the creditors as described in the debtor’s reorganization plan. If no payments are being made then the plan is not funded and the Chapter 13 case fails. But it is possible that the debtor’s property or contributions from third parties could be used to provide the payments needed to complete the plan. When considering whether a case should continue the court will determine whether it is possible under the case’s specific circumstances and whether it is in the best interest of the parties involved. Usually these cases are dismissed.