Bankruptcy by inheritance Automatic translate

The death of a loved one brings not only grief to a family but also legal obligations. Creditors often begin calling relatives just weeks after the funeral. Banking systems track the status of borrowers and automatically transfer cases to the collection department. Heirs are faced with a difficult choice: accept the property along with the debts or give up everything at once.

Russian law offers a third option, which few people know about. Bankruptcy of the estate allows for the settlement of financial claims without the heirs filing for personal bankruptcy. This mechanism separates the deceased’s debts from the family’s personal assets. The procedure is regulated by Section 4 of Chapter X of Federal Law No. 127-FZ "On Insolvency (Bankruptcy)."

Mechanism for the transfer of debt obligations

The Civil Code establishes the principle of universal succession. Heirs who accept assets automatically accept liabilities. It is impossible to inherit an apartment and refuse the deceased’s consumer loan. The liability of heirs is limited to the value of the property transferred to them.

If the debt is 5 million rubles, and the old dacha is worth 500,000, the bank won’t be able to collect the difference from the heirs’ personal accounts. However, the process of proving the value and litigating with creditors drains resources. Creditors file lawsuits, bailiffs seize accounts, and relatives are forced to prove their liability limits in court.

This is where the deceased’s bankruptcy becomes a viable option. It transfers the conflict to the legal arena of arbitration court. The heir ceases to communicate directly with the debt collectors. A financial manager takes over all interactions. For detailed explanations, see https://yurist-bfl.ru/articles/bankrotstvo-fiz-lic-v-2025/ .

Who initiates the process?

Three categories of persons may file an application with the arbitration court. The first category is the heirs who have accepted the inheritance. This is a logical step if the value of the liabilities exceeds or is equal to the value of the assets.

The second group of claimants are creditors. Banks or tax authorities initiate proceedings to gain access to the deceased’s assets if the heirs are inactive or conceal property.

The third category is the notary handling the probate case. The law grants them this right, although in practice, notaries rarely exercise it. The initiative usually comes from those who stand to lose money.

Features of the procedure

When an estate is declared bankrupt, the court skips the debt restructuring stage. The deceased individual is unable to restore solvency or find a new job. The property sale process is immediately initiated.

At this point, the bankruptcy estate is formed. It includes everything that belonged to the deceased on the day of death: real estate, vehicles, bank accounts, stocks, and business interests. The property of the heirs themselves remains intact. This is the main difference from a regular personal bankruptcy. A relative’s financial ruin does not damage the credit history of their children or spouse.

The judge appoints a financial manager. This specialist conducts an inventory, requests information from Rosreestr and the State Traffic Safety Inspectorate, and identifies suspicious transactions. If the deceased gifted a car to a neighbor shortly before his death, the manager will challenge the transaction and return the car to the bankruptcy estate.

Funeral expenses and payment priorities

The legislature has provided for a humane approach to expenses related to death. Costs for a proper funeral and the protection of the estate take priority over bank claims. If an heir has spent personal funds on funeral services, they are entitled to receive compensation from the estate without prioritization.

These expenses are considered current payments. They are paid first, before the money is distributed among creditors. In practice, the financial manager reserves a portion of the proceeds from the sale of the property to cover these costs. The heir must retain all receipts and contracts with funeral homes.

The fate of the only home

The most pressing issue concerns real estate. In a standard bankruptcy, the debtor’s sole residence enjoys immunity from execution. In the event of the debtor’s death, the situation changes, but the protection often remains.

If the apartment is transferred to an heir for whom it also becomes (or already is) the only suitable residence, the court excludes it from the bankruptcy estate. Creditors will not be able to seize this property.

An exception is mortgaged housing. A mortgaged apartment is always subject to sale, regardless of whether minors or disabled persons are registered there. The bank takes the collateral, sells it, and the remaining debt (if any) is written off.

Psychological and legal comfort of heirs

Joining the procedure eliminates the need for relatives to personally attend district court hearings. The arbitration process is standardized. Heirs don’t have to explain to bailiffs each time that they didn’t take out these loans.

Once the estate is declared bankrupt, interest, penalties, and fines cease to accrue. The debt is fixed. This distinguishes the procedure from standard civil proceedings, where interest can accrue until actual payment is made.

Upon completion of the property sale, outstanding creditor claims are considered satisfied. Even if the property sold was not sufficient to cover all debts, the obligations are extinguished forever.

Risks and consequences for the family

Bankruptcy of the deceased does not entail the standard consequences for the living. Heirs are not prohibited from holding management positions or traveling abroad. Bankruptcy status is assigned to the estate, not to a specific individual.

The main risk is challenging transactions. The financial manager will review transfers and gift agreements for the past three years. If it is discovered that the deceased transferred assets to relatives, the court may order the property to be returned.

There are also costs associated with the procedure itself. The applicant bears the costs of the trustee’s services, publication in the Unified Federal Register of Bankruptcy Information (EFRSB), and publication in the Kommersant newspaper. These costs are typically covered by the debtor’s assets, but at the start of the process, the applicant often deposits funds with the court.

Specificity of hereditary transmission

Sometimes an heir dies before accepting the inheritance. The right to accept the inheritance passes to their own heirs. This chain of events complicates bankruptcy proceedings. Lawyers must separate two different estates and two different sets of creditors.

In such situations, the arbitration court may consolidate cases or hear them in parallel. The key objective is to prevent the commingling of assets from different lines of succession. Creditors of the first deceased have no rights to the property of the second, and vice versa, unless there is commingling of assets.

Interaction with a notary

Filing for bankruptcy suspends the issuance of certificates of inheritance. The notary transfers asset management responsibilities to a financial manager. After the bankruptcy is completed, the notary issues certificates only for the property remaining after settling accounts with creditors (if any).

This mechanism eliminates the situation where an heir receives a certificate, registers ownership, and then receives a claim for seizure of the property a month later. Legal certainty is achieved immediately after the conclusion of the arbitration case. Court rulings become the final decision in relations with the deceased’s banks.