How Bankruptcy Can Affect Your Florida Probate Estate
In many ways, probate administration and bankruptcy are similar legal processes. Both involve creating a legal “estate” for an individual’s assets. These estates may have legal rights and interests that conflict with that of the individual. And both types of estates are subject to claims from the individual’s creditors.
Florida Estate Liable for $133,000 Debt Arising from Bad Loan, Debtor’s Misconduct
It should also be noted that if a person files for bankruptcy and dies before their case is completed, the bankruptcy does not simply disappear. In a Chapter 7 bankruptcy, for example, a court-appointed trustee is charged with liquidating a deceased debtor’s assets and paying off any creditors to the extent possible. This liquidation process does not require the debtor to be alive. And once liquidation is complete, the bankruptcy court will usually discharge any remaining unsecured debts, meaning the creditors cannot enforce any further claims against the deceased debtor’s estate.
Of course, not all bankruptcies are so simple. In some cases a creditor may file a lawsuit in bankruptcy court to prevent the discharge of their specific debt, typically due to some fraud or misconduct on the part of the debtor. And if the court sides with the creditor, this in turn can affect the estate of the deceased debtor.
A recent decision from a federal bankruptcy judge in Orlando, Kolb v. Bentley, offers a case in point. The judge explained that a debtor in a Chapter 7 bankruptcy case “went to extraordinary lengths” to hide a vintage automobile from one of her creditors. More precisely, the car was offered as security on a private loan of $50,000 made by the creditor to the debtor’s son.
After the son stopped making payments on the loan, the creditor demanded the debtor turn over the car. Extensive litigation followed in the Georgia courts. Eventually, a Georgia judge ruled the car belonged to the creditor. But after learning of the judge’s order, the debtor arranged to have the car auctioned off in Florida. She then deposited the proceeds of the sale into her bank account, and later used the money to pay off her mortgage and personal expenses.
In early 2017, the debtor filed for Chapter 7 bankruptcy. She did not inform the bankruptcy court about the money she obtained from the sale of the car, nor did she disclose the creditor’s secured interest in the car. While the bankruptcy was pending, the debtor was declared incompetent and a Florida court appointed her nephew to serve as her legal guardian.
The debtor later passed away. The nephew then opened a probate estate in Florida. In April 2019, the bankruptcy judge issued a decision denying a discharge of the now-deceased debtor’s debt to the creditor. This included the amount of the original $50,000 loan to the debtor’s son, which with accumulated interest was now more than $133,000. The judge further reduced the debtor’s homestead exemption–the amount of home equity not subject to creditor claims–to reflect the improper use of proceeds from the sale of the car to pay off her mortgage.
The upshot of all this is that the creditor can still pursue her claim against the debtor’s probate estate–and creditor claims take priority over any distribution to the beneficiaries of the will or trust.
Speak with a Lee County, Florida, Estate Planning Lawyer Today
As you can see, probate is not a “get out of debt free” card. Your trust or future estate may need to deal with creditors and outstanding debts. If you would like to learn more about this subject from an experienced Fort Myers estate planning attorney, contact the Kuhn Law Firm, P.A., at 239-333-4529 to schedule a free consultation today.