How Does Bankruptcy Affect Life Insurance Policies?

If you have a life insurance policy and are considering a Chapter 7 or Chapter 13 bankruptcy, you need to seek legal counsel to see how that policy would be affected.

If the life insurance policy is an unmatured term policy, then it would not be affected by the filing of a bankruptcy petition.  Any periodic life insurance premium which is a reasonable expense is includable in your Schedule J budget on your petition.

Whole life insurance policies are treated differently.  They have cash surrender value.  This means that you can terminate the policy at any time and receive a check.  In Chapter 7 and Chapter 13 bankruptcies, the cash surrender value of a whole life insurance policy is considered to be an asset of the debtor’s estate which may be available for distribution to creditors.

A debtor can exempt up to $12,625.00 in cash surrender value of a whole life insurance policy under Federal exemptions.  S/he may also be able to use all or part of the “wildcard” exemption to protect additional cash surrender value, depending upon what other assets the debtor owns.

If a Chapter 7 debtor has unexempted cash surrender value in a whole life insurance policy, it is possible if not likely that the trustee will require the debtor to liquidate that policy and transfer the proceeds to the trustee for distribution to creditors.

In Chapter 13, the trustee would require that an amount equal to the unexempted cash surrender value of a whole life insurance policy be included in the debtor’s plan payment for distribution to the debtor’s unsecured creditors.

The main reason that most debtors do not file a pro se bankruptcy is because they do not have the legal know-how.  The question of protecting a whole life insurance policy in a bankruptcy filing is a perfect example.  An experienced attorney can guide the debtor on the proper use of Federal bankruptcy exemptions to maximize retention of the debtor’s assets.  Contact me now to discuss  your bankruptcy options.

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Charles D. Whelan III has been committed to excellence for over 30 years. With offices located centrally in New Jersey, he is able to provide businesses and individuals with excellent legal services.

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