The need to file bankruptcy can strike anyone for any reason. That includes people who have prepared for the future by purchasing life insurance policies.
Fortunately, in New York there are generous exemptions to help protect life insurance policies.
There are Two Types of Policy
A term life insurance policy doesn’t have cash value anyway. It doesn’t mature until death. It’s not an asset and in fact counts as a monthly bill for the purposes of calculating your overall financial picture.
A whole life policy is a little different. It’s an asset and will have to be protected.
In addition, the proceeds from an insurance policy can still get rolled into a bankruptcy estate if you receive them within 180 days of filing, which means you’ll want to work closely with your attorney to make sure those proceeds are protected.
Exemptions Make the Difference
In a Chapter 7 bankruptcy the trustee could liquidate your life insurance policy to pay debts if your attorney fails to get them exempted correctly (or if you do, attempting to file bankruptcy on your own).
A Chapter 13 factors in all assets including the cash value of a whole life policy, but it’s still possible to protect the value of that policy with exemptions.
Choose New York State Exemptions
Federal law exempts unmatured life insurance policies of up to $13,400 but New York lets you choose between the state exemptions and the federal exemptions, and in the case of insurance policies the New York exemptions are far more helpful and forgiving.
New York exempts insurance annuities unless the payments aren’t necessary to meet ordinary financial needs; annuities purchased within six months of filing are limited to $5,000.
Proceeds from life insurance policies are totally exempt in New York if your spouse took out the policy and died.
Your bankruptcy attorney will work to make sure all of your exemptions work together to protect as many of your assets as possible.
You must still report your policies to the court.
Even exempt assets must be disclosed when you’re filing for bankruptcy, both the payments you pay for policies, and any cash value or proceeds from those policies. Failure to disclose these policies correctly can threaten your bankruptcy case and result in its dismissal.
If you are coming into bankruptcy with a complex financial profile then you need an attorney’s help more than most. Make sure that you work with an experienced bankruptcy lawyer to get best results.
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