It’s reasonable to worry about the fate of certain assets during bankruptcy, especially big nest eggs like your life insurance policy. Especially if you’re declaring bankruptcy after the age of 65.
This is one of those areas of bankruptcy law that effortlessly helps to demonstrate why it’s so important to have an attorney when you file. Whether or not you get to keep your life insurance policy depends largely on what kind you have and what bankruptcy strategy you ultimately adopt.
There are two types of life insurance: term life, and whole life.
A term life policy is just a piece of paper. It’s a promise, a contract that says you will pay your premium and your beneficiaries will receive money when you die.
Until you die, it’s not worth anything.
If anything, it helps you with the means test if you’re declaring Chapter 7, because it’s another monthly payment to report, and one that is an allowable expense. If you’re declaring Chapter 13, it reduces your disposable income, which could reduce your monthly bankruptcy payment.
Whole life policies are different. They gather cash value every year you pay your premiums. You can access that value. Eventually the dividends from the investment account the cash value goes into could pay for your premiums, or even for your lifestyle. Many people use whole life for retirement.
Whole life doesn’t even necessarily pay a beneficiary: it only does that if you die before the policy expires.
This all means that your whole life policy counts as an asset and has to be accounted for as such. Depending on the value of your policy, your attorney may be able to use exemptions to protect it. Otherwise, you might have to file Chapter 13 to keep the value of your whole life policy safe.
In a Chapter 7 bankruptcy the trustee takes all your assets and uses as many of them as possible to pay off your creditors. The rest is discharged.
So if you have $50,000 in assets and $100,000 in debt, the trustee will take that $50,000 and divide it up among your creditors. The rest of the debt gets wiped out.
An “exemption” is any asset that won’t get used this way. Instead, you’ll be allowed to keep it.
Chapter 13 bankruptcies are different. The value of your assets don’t matter. You’re undergoing a reorganization plan. You’ll be paying a trustee a monthly amount, which will then be divided up among your creditors. You’ll pay on that plan for three to five years. Whatever’s left over gets discharged, though if you want to say, keep a house you’ve got a mortgage on you can keep paying on certain debts to keep those accounts open.
If you have a whole life policy that’s worth a significant amount of money then a Chapter 13 bankruptcy may be the way to go, especially if you’re counting on that money for retirement.
Speak to an attorney today.
Explanations like this one may make bankruptcy law seem simple, but in reality there are many different issues which could complicate a case.
If you’re concerned about the fate of your assets and your best bankruptcy strategy, call us today for a free consultation. Going in with an attorney is the best way to protect the assets you want and need to keep.
CONTACT US NOW
Get Your Free Consultation
Simon Haysom is proud to serve the following communities: