Can an Undischarged Bankrupt Be an Executor of a Will?
The ultimate goal of bankruptcy is the discharge. A bankruptcy discharge is a court injunction that prevents creditors from forever seeking to collect a debt from you, and is entered by the bankruptcy court at the end of the bankruptcy process. If a debtor is appointed as an executor of a will prior to the bankruptcy discharge, the interest and power of the debtor as an executor may become property of the bankruptcy estate and the bankruptcy trustee.
The executor of a will administers the property held in the will, distributing it to heirs and dealing with various administrative matters. An executor technically holds a legal interest in all of the property held in a will, while the heirs of the deceased person have an equitable interest in the property. This distinction is extremely important in the context of bankruptcy. Although becoming an executor while you are still in bankruptcy and prior to the discharge can cause administrative problems, a debtor can still be an executor.
Executor in Bankruptcy
Upon the filing of a bankruptcy case, all of the assets of the debtor become property of the bankruptcy estate.This includes all legal and equitable interests of the debtor. Therefore, because an executor holds legal interest in the assets of a will, those assets also become a part of the bankruptcy estate. This can cause delay and confusion in the administration of the will and distribution to heirs. Technically the bankruptcy trustee can seize the property. However, because the heirs hold equitable interests in the property, the bankruptcy trustee will have to take over the duties of the executor.
In a Chapter 7 liquidation bankruptcy case, the trustee seizes the unexempt property of the debtor for liquidation and payment to creditors. The advantage in a Chapter 7 bankruptcy is that only property owned by the debtor up to the time of the bankruptcy filing becomes property of the bankruptcy estate. Therefore, if a debtor becomes an executor after a Chapter 7 bankruptcy filing, his legal interest as an executor does not become property of the estate.
Chapter 11 and 13
In both Chapter 11 and 13 bankruptcy cases, which normally last for several years, all property acquired by the debtor prior to closure of the case becomes property of the bankruptcy estate. Closure of a case occurs after the entry of the discharge. Thus, unlike a Chapter 7 case, Chapter 11 and 13 debtors will lose their legal interest as an executor even if it was acquired after the bankruptcy filing.