How does bankruptcy affect my estate plan?
While under the ownership of a bankruptcy estate, you lose some control over your money and property. This is because the bankruptcy trustee must ensure you’re meeting your financial obligations.
In the short term, you likely won’t be able to make any big investments or purchases, and you might lose some property too. In the long term, bankruptcy leaves a mark on your credit score
for about seven to ten years.
And remember: if you want to leave anything to your loved ones, it’s a good idea to deal with bankruptcy before it’s too late.
Bankruptcy impacts the instructions in your Last Will
for distributing your property and assets after your death. If you have outstanding debts, authorities will pay them first before dealing with the gifts you intended for others
. This is the case whether you’re bankrupt or not.
If you’re bankrupt and need to sell certain assets that you wished to leave as gifts in your Last Will, you should update your Will and remove those gifts.
Bankruptcy and a Power of Attorney
A Power of Attorney
must grant your agent specific powers
to represent you during bankruptcy proceedings. Even so, your agent’s ability to deal with your assets and debts will be limited in the same way as if it were you acting.
If you become incapcitated part way through bankruptcy proceedings, your agent would be able to act as your representative for the remainder of the proceedings (as long as they have the power to do so under the POA).
However, if your attorney-in-fact is the one who files bankruptcy, the court may investigate their authority and your capacity to ensure there isn’t any fraudulent or illegal behavior occurring. Otherwise, the agent can act on your behalf and the trustee will still manage the bankruptcy estate.
How long after bankruptcy can I buy a home?
The time it takes to get a home loan after bankruptcy depends on how quickly you can increase your credit rating.
With a Chapter 7 filing, you may be able to liquidate your assets and settle your debts within a few months. With Chapters 11 or 13, however, it may take years to be discharged from your debts.
To top it off, mortgage brokers often won’t approve loans until at least two or more years after you’re discharged
. However, with the court’s approval, some types of mortgages are available after being 12 months into a Chapter 13 repayment plan.
Truth be told, your credit score suffers terribly after you file for bankruptcy. Plus, companies can see bankruptcy history on your credit report for seven to ten years after the fact.
Is it even possible to raise your score after this? You bet it is!
There is no one-size-fits-all plan for recovering after going bankrupt. However, taking these steps can improve your eligibility for home loans:
- Pay your bills on time and start a savings fund that you contribute to regularly.
- Get a secured credit card to start a history of responsible credit use.
- Ask a co-signer to help you qualify for a home loan.
Generally, you’re better off saving money for a down payment (or to secure another loan) than relying on a line of credit. And, frankly, rebuilding your credit score and saving money for a home may take several years of patience and discipline.
Can an estate file for bankruptcy?
However, if you die while in the midst of filing for Chapter 7 bankruptcy
, your executor can continue the case on your behalf. They’ll help oversee the liquidation of your assets and repayment of your debts. After this, the remainder of your estate (i.e., your residuary estate
) can go to the beneficiaries named in your Last Will and Testament.
If you die before closing a Chapter 11 or 13 bankruptcy case, things can get a little complicated. Depending on the circumstances, the court may choose to continue the case as if you hadn’t died. Your executor may work with the bankruptcy trustee to follow through with the repayment plan.
The reality is, if you have an insolvent estate, your beneficiaries probably won’t have anything left to inherit.
- Asking for the case to be dismissed
- Asking for a hardship discharge
- Asking to convert the case to a Chapter 7 filing (then liquidating the estate to satisfy the bankruptcy terms)