Thursday, June 02, 2022

Judge Michael Parker Addresses the Dead Debtor Problem

 While it is not pleasant to contemplate, sometimes a debtor passes away before his case is completed. This raises the question of whether the case can go to completion and how to complete the financial management class. Judge Michael Parker addressed this issue in one of his first published opinions as a judge. (This is actually his third opinion, but the first one that I had the time to write about).  In re Ibarra, Case No. 19-52413 (Bankr. W.D. Tex. 6/1/2022), which can be found here.

What Happened

The Debtor filed Chapter 13 and confirmed a plan in 2019. The Debtor passed away on October 9, 2021 prior to completing payments under the Plan and before completing a personal financial management course. The debtor's probate estate representative and daughter made the remaining payments under the plan and moved for an order waiving the debtor's obligation to complete a financial management course. As the Judge succinctly stated, "Death prevents the Debtor from completing a financial management course." Opinion, p. 1.

The Court's Opinion

It should come as no surprise that the Court granted the motion. The Court stated its analysis with Fed.R.Bankr.P. 1016, which states that is a Chapter 13 debtor dies "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 . . . had not occurred."

Judge Parker then explained:

Because discharge is the usual conclusion of a chapter 13 case, Rule 1016 contemplates granting a discharge to a deceased chapter 13 debtor under qualifying circumstances. Here, plan payments are complete and “further administration” requires only the ministerial task of completing a financial management course. The Court notes that the Debtor’s death defeats the purpose of the course requirement, which is to prevent bankruptcy recidivism.
Opinion, p. 3. 

The Rule allows the Court to consider the best interest of the parties. Here, neither the Trustee nor the creditors objected. The Court noted that the debtor's heirs would benefit from allowing the case to proceed. 

The next question was whether the personal financial management course could be waived. Section 109(h)(4) allows the Court to waive the personal financial management course due to "incapacity, disability, or active military duty in a military combat zone." A deceased debtor "suffers from the ultimate disability." 

Lessons From This Case

The main takeaway from this case is that the requirement to complete a personal financial management course can be waived due to incapacity. This would apply in both Chapter 7 or Chapter 13. As Judge Parker pointed out, the purpose of the personal financial management course was to keep the debtor from filing future bankruptcies. Once the debtor has passed away, this  is no longer a problem. 

The statute also allows both the credit counseling briefing and the personal financial management course to be waived due to disability. Bankruptcy Rule 1004.1 expressly allows an infant or incompetent person who has a representative to file bankruptcy. This raises an interesting question as to how the personal representative can verify the schedules or testify at the creditor's meeting. However, the two rules combined allow the personal to file through their representative and waive the requirement of the pre-filing and post-filing certificates.

One other practice point highlighted by the opinion is what to do when a debtor passes away prior to completing payments under a Chapter 13 plan. One option, as occurred here, is for the debtor's heirs to complete the payments for him. Another option alluded to by Judge Parker is to request a hardship discharge under 11 U.S.C. Sec. 1328(b). This is available where the failure to complete plan payments "is due to circumstances for which the debtor should not justly be held accountable." 

Losing a client during a case can be traumatic for the family and attorney alike. Judge Parker's Ibarra opinion provides some good guidance and how to handle this situation. 

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