When a debtor files for bankruptcy, they may protect some and sometimes even all of their assets, provided they are covered by the allowable bankruptcy exemptions. The bankruptcy trustee assigned to a debtor’s case can liquidate or sell a debtor’s non-exempt assets in order to pay the claims from the creditors in a case. While most bankruptcy cases are classified as “no asset,” meaning all the debtor’s assets are protected, it is important to review all the debtor’s assets to make sure they are actually protected by the available bankruptcy exemptions. There is a set of federal exemptions in the Bankruptcy Code, but each state has its own exemption laws as well. For New York bankruptcy filers, a debtor may choose either the federal exemptions or New York’s set of exemptions. (It should be noted that not all states allow a bankruptcy debtor to use federal exemptions.) A debtor must choose between state and federal exemptions and cannot mix and match between them. Both the federal and New York laws include exemptions for life insurance policies that are in the debtor’s name, but they have different exemption limits.
In a bankruptcy proceeding, there are two primary ways that life insurance may affect your case. The first is if you own a life insurance policy that has a cash value. The second is if you are a beneficiary under a life insurance policy and the insured dies within a specific period before or after you file your bankruptcy. To protect your life insurance interests, you should understand what type of life insurance you have, the value of that insurance, whether the insurance is part of your bankruptcy estate, and whether it is exempt from liquidation.
Every life insurance policy has three things: an owner, an insured, and a beneficiary. The owner is in control of the policy and can make changes or cancel the policy. The insured is the person whose death will trigger payment, and the beneficiary is the person who receives the proceeds from the insurance. If you are the owner of the policy, you can also be the insured or the beneficiary, but you cannot be both.
Does My Life Insurance Policy Have a Cash Value?
To determine your policy’s cash value, you need to know what type of policy you have and if there is a cash value for it. There are three primary forms of life insurance: term, universal and whole life insurance. Term life insurance policies do not have a cash value. A term policy will pay a guaranteed death benefit to the beneficiary when the insured dies. A term life policy is still required to be listed as an asset in your bankruptcy petition, even though it has no cash value. Other types of life insurance have an investment or saving component. To find out the cash value of your policy, contact your life insurance company to obtain a current value. Your policy agreement may also set forth the approximate value.
Is My Life Insurance Policy’s Cash Value Exempt in Bankruptcy?
Under the current federal exemptions, you can claim up to $14,875.00 of your policy’s cash value as exempt in bankruptcy. To claim this exemption, the policy must meet two criteria: the debtor must be the policy owner and the insured must either be the debtor or someone who can claim the debtor as a dependent. If your policy’s cash value is higher than the exemption, you may be able to combine this exemption with the federal wildcard exemption ($1,475 plus up to $13,950 of any unused amount of the homestead exemption) to protect your life insurance cash value more fully. See 11 USC § 522(d).
New York State’s Debtor and Creditor Law § 282 exempts non-mature life insurance with a cash value differently that the exemptions in the Bankruptcy Code. It provides that insurance policies are exempt from bankruptcy administration as provided in § 3212(b)(6) of New York’s Insurance Law. Instead of protecting a specific cash value, New York law restricts the ability of the Trustee to “accelerate payment” of the policy. This is a much more generous exemption as there is no dollar limit as with the federal exemption and as a result, a debtor can exempt the full amount of the cash value of their non-mature life insurance policy.
Are Life Insurance Proceeds from a Mature Policy Part of My Bankruptcy Estate?
If you are entitled to receive life insurance payments from a mature life insurance within the 180 days after you file a bankruptcy case, those proceeds are considered to be part of your bankruptcy estate. If you become entitled to life insurance proceeds more than 180 days before or after you file bankruptcy, the proceeds are not specifically part of your bankruptcy estate. Under the Bankruptcy Code, the relevant date to determine whether proceeds are part of your estate is the date that you become entitled to receive the proceeds of the policy. Typically, this happens upon the death of the insured. If that date is within the 180 days of a bankruptcy filing, the insurance proceeds that you are entitled to receive are part of your bankruptcy estate, regardless of when you actually receive the funds. If life insurance proceeds are a part of your bankruptcy estate when you file your petition, you will need to list them in your bankruptcy schedules and can only keep the proceeds if you can claim them or a portion thereof as exempt. If the debtor obtains the right to receive life insurance after a case has already been filed and within 180 days of the filing, the right to receive those proceeds becomes an asset in the bankruptcy estate and the debtor has to advise the Trustee of that right and subsequent asset.
Can I Claim Life Insurance Proceeds as Exempt?
Under the federal exemption laws, life insurance payments you receive or are entitled to receive as a beneficiary are exempt in bankruptcy if they meet two requirements. First, the insured must have been able to claim you as a dependent on the day that they died. Second, the insurance payments must be reasonably necessary to support you and your dependents. You may have to provide evidence of your expenses and explain why the proceeds are necessary to support you and your dependents. This too can potentially be combined with the federal wildcard exemption. Under New York’s Insurance Law § 3212(b)(2), a debtor may protect the “proceeds and avails” of a life insurance policy from “trustees in bankruptcy” only if the person who effected the policy is the spouse of the beneficiary. In essence, New York law says that “if A buys insurance on B’s life and designates A as the beneficiary, then any interest A has in the proceeds and avails of the policy is protected against B’s creditors, and moreover, if A and B are married, then A’s interest is protected against A’s creditors as well.” Wornick v. Gaffney 544 F.3d 486 (2d Cir. 2008).
Contact the Law Offices of David I. Pankin, P.C.
If you have any questions about whether any of your assets would be exempt in a bankruptcy filing, including life insurance, you should speak with an experienced bankruptcy attorney at the Law Offices of David I. Pankin, P.C. We have over 25 years of experience helping debtors obtain a financial fresh start. You can contact us at (888) 529-9600 to schedule a free consultation or use our easy online contact form.
