Dear Bankruptcy Adviser,
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I've been consulting with bankruptcy lawyers about my financial situation since my mom passed away. She did not have a will. The estate hasn't gone through probate yet, but I don't want to get involved. There wouldn't be enough money after the sale to pay off my debtors. I don't want anything to do with this house. Will this cause a problem for me filing Chapter 7? I am divorced and receive Social Security income and child support.
Dear Karen, I'm sorry for your loss. Let's first tackle this issue with you and the probate court, then we can talk about the issue of bankruptcy. I must first note that bankruptcy and probate vary from state to state, so double-check whether there are any unique laws in your state that could affect your filing.
You have every right to throw your hands up and not deal with this house anymore. However, even if you don't want to get involved in the probate process, you most likely will have to as your mother's heir. As such, you are entitled to proceeds from your mother's estate -- in your case, her home.
If you truly did not want any involvement, you could go to the probate court and explicitly disclaim any proceeds that you are entitled to receive. In most states, you must disclaim your interest in the estate in a timely manner and before you file bankruptcy. That being said, no one can make you take this house or sell it to pay your creditors -- unless you file bankruptcy.
When you file bankruptcy, the court assigns an individual to your case, called a trustee. The trustee steps into your shoes to handle your assets. It is his or her job to find unprotected assets (such as the house), sell those assets and pay your creditors. In return, the trustee earns a fee for paying your creditors.
In your case, the trustee would get involved in the probate process if he or she thinks any issues might arise. For example, a trustee wouldn't allow you to disclaim interest in your mother's estate after filing bankruptcy because you don't want to deal with the hassle, since you may be entitled to something.
Otherwise, the trustee would usually wait until probate ends and then sell the house on your behalf. The proceeds from the sale of the house will be turned over to the bankruptcy trustee who will settle creditor claims.
There is also a chance for you to receive some cash after the trustee sells the house. Each state allows a bankruptcy filer to exempt -- or protect -- some assets. The available exemption amounts vary greatly from state to state. You will receive funds up to the exemption limits that you are entitled to receive before the trustee pays the creditors. The trustee will then take the rest to pay his or her fees and your creditors.
Before you file, see how much you could get from the sale of the property. You say it won't pay off your debt, but it's worth it to check for sure. It would be a shame to file bankruptcy only to have all your creditors paid in full from the sale of the house.
At the same time, you might be tired of creditor harassment and other credit-related issues. Or you just don't want to deal with probate and selling the house, so you want to file bankruptcy now and move forward.
Do a little more research before making this decision. If your ultimate decision is to file bankruptcy before trying to sell the house, make sure it is a well-informed one.
Copyright 2012, Bankrate Inc.