Can an Estate File for Bankruptcy?

by Nicholas B. Sisson ; Updated July 27, 2017

When heirs inherit an estate following a close relative's death, the deceased's outstanding debt could outweigh the value of the estate. This may mean that the surviving heirs won't inherit anything. This issue raises questions about how this affects surviving heirs, especially children, as an estate cannot file for bankruptcy.

Bankruptcy Basics

Bankruptcy is a court procedure that eliminates or reduces people's debts if they have difficulty making payments on debt obligations such as mortgages or credit card balances. Those who wish to have their entire debt forgiven file for bankruptcy with a local court under Chapter 7 of the U.S. Bankruptcy Code. Those seeking a reduction in what they owe file for under Chapter 13. Under Chapter 7, the court orders the sale of all of the debtor's non-exempt property to cover the debt. Under Chapter 13, the court allows the debtor to retain property and pay the debt over time. The court forgives any remaining debt and absolves the bankrupt party of all repayment obligations.

Estates and Wills

Estate is a legal term used in connection with all of the property of a deceased individual, including such items as real estate, bank accounts, personal belongings and financial assets. The terms of a will written and legally certified by the deceased before death allocates the contents of the estate among the surviving heirs. The deceased's will serves as the basis for the probate process in which a named executor ensures the estate's distribution among heirs according to the law.

Probate

The probate process legally ensures and documents the rightful distribution of an estate consistent with the terms of a will and handles any disputes related to the estate. During the process, the probate process charges the executor named in the will with safeguarding and overseeing the delivery of an estate to the deceased's heirs at the conclusion of the proceedings. In the absence of a will, an estate may undergo probate with an executor appointed by the court, usually a child or other close relation.

Bankruptcy and Estates

As a bankruptcy filing cannot be posthumous, an estate cannot file for bankruptcy. If the deceased leaves unsettled bills or debts, the probate court has the authority to sell the assets of the estate to repay creditors. If the debts exceed the estate's total value, the court forgives all remaining debt in a manner similar to a bankruptcy court, with the exception of any loans for which a survivor may have co-signed. Although this process leaves the surviving heirs with no material legacy, the probate process shields them as much as possible from inheriting the deceased's unpaid bills and other debts.

About the Author

Nicholas B. Sisson holds a B.A. in economics from Ithaca College and a certificate in technical communication from J.B.S. Technical Communications, Ltd. Working in investment operations, Sisson participated in an initiative to revise and rewrite his group's procedure manual. More recently, Sisson created definitions of financial terms for the glossary of a major financial website. He has been writing since 2008.