Protecting Life Insurance

When filing a chapter 7 bankruptcy, you are allowed to protect a certain amount of personal property. One of those items of personal property is life insurance. Life insurance is treated two different ways when filing bankruptcy. The first involves term life insurance. Term life insurance provides for a death benefit. What this means is that the policy has no cash value while you are living, however, upon your death, a beneficiary will receive a death benefit. Because there is no cash value while you are alive, this is technically not an asset that can be administered by the chapter 7 trustee. Let’s contrast this with whole life insurance. Whole life insurance often contains a cash surrender value. This value is money that has accumulated in your policy which can be taken out and deducted from the amount of your death benefit. This cash value buildup often provides a problem for chapter 7 debtors.

Recent Case Example

In a recent case filing, the debtor had a whole life insurance policy valued at a $13,000 cash surrender value. At the time of the 341 meeting of creditors, the debtor had approximately $6000 worth of cash surrender value. The value had gone down because he had been borrowing against his cash surrender value. This cash surrender value would also be protected in a bankruptcy filing provided that the beneficiary is either a spouse or a dependent child. In this particular case, the beneficiary was an adult child. Since the beneficiary was neither a spouse nor a dependent child, the cash surrender value is an asset just like money in a bank account that can be taken if not protected with an exemption.

State of Illinois Exemptions

The state of Illinois allows for an exemption in some personal property. For cash surrender life insurance, we utilize the $4000 wildcard exemption. This wildcard exemption can be sprinkled over any type of personal property. Since the debtor had very little in the way of household goods and very little in the way of bank accounts, the majority of his $4000 wildcard exemption can be placed over his cash surrender life insurance policy. Now, even with utilizing his exemption, there is some non-exempt or exposed cash surrender value in his life insurance policy. This will be up to the chapter 7 trustee as to whether or not he wishes to administer that asset, negotiate a buyout of that asset, or simply determined that the asset is too small and it would be too burdensome to administer.

As you can see, life insurance and bankruptcy can become complex. For this reason you need a seasoned, experienced bankruptcy attorney to handle your bankruptcy case. If you go to an inexperienced firm or one that simply does not take the time and effort to do your case properly, you may find yourself having to turn over the cash surrender value of your life insurance policy to a chapter 7 bankruptcy trustee in exchange for your fresh start.