It's possible to protect the value of a life insurance policy or money received as a beneficiary under another person's policy in bankruptcy. But it will depend on several factors, including:
If you'd like to learn more about what happens to debt and property in bankruptcy, be sure to check out the suggested resources at the end of the article.
Most people don't file for bankruptcy after receiving a significant life insurance payout or if they suspect they might receive one. Why? Because people who have large amounts of money can pay their debts. They aren't bankrupt.
But it's possible you've already spent the lion's share of a death benefit or received a relatively small amount. In that case, bankruptcy might be an option, and the amount you'd keep would depend on the protections offered by your state.
To do this analysis, you'll need to know the following:
We explain more below. If you'd like to learn about protecting a life insurance policy in bankruptcy, not a life insurance payout, skip to "How to Protect Term and Whole Life Policies in Bankruptcy."
Yes. You'll report any amount of life insurance proceeds you have in your possession when filing for Chapters 7 and 13. You'll also disclose any funds you're owed but haven't yet received.
The life insurance reporting requirement is one of the few requirements that continues for 180 days after filing for Chapter 7 bankruptcy. If you come into life insurance money after filing your case, you'll inform the bankruptcy trustee by amending your bankruptcy petition.
Because life insurance payouts are a rich payment source for creditors, at the 341 meeting of creditors, the bankruptcy trustee appointed to your case will ask you whether you anticipate receiving insurance funds in the future. Learn about other 341 meeting questions.
If you receive life insurance funds during Chapter 13 bankruptcy, you'll want to talk with your lawyer about your options. Your lawyer can help you determine whether you can use the funds to pay your Chapter 13 payment plan early, dismiss your Chapter 13 case and repay debts outside of bankruptcy, or pursue another option.
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Here's What You'll Report in Your Bankruptcy Petition |
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Term Life Insurance Policy |
If you're paying for a term insurance policy, report it in your bankruptcy case. It's unlikely to have value. |
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Whole Life Insurance Policy |
If you have a whole life insurance policy, report it in your bankruptcy case. Also, report the policy's cash value. |
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Life Insurance Proceeds |
Report all life insurance proceeds you're entitled to or possess in your bankruptcy. You'll include funds received after cashing out a whole-life policy and death benefits from term and whole-life policies. |
It's possible because cash assets aren't easy to protect in bankruptcy. You'll need a bankruptcy exemption covering the funds, and most states don't provide much protection for money, which life insurance proceeds essentially are.
Start by perusing your state's bankruptcy exemptions. Look for an exemption that covers cash or money in a bank account. If your state doesn't provide one, or if it isn't enough, a wildcard exemption allowing filers to protect any property they choose might be available.
But review wildcard exceptions carefully because some states exclude real estate and cash. Also, check the federal wildcard exemption amount if your state allows you to choose between the state and federal bankruptcy exemptions.
Finally, a few states let filers keep insurance proceeds when needed to maintain a home and other living expenses. It's a long shot, but worth checking. Ultimately, a local bankruptcy lawyer will be in the best position to help you protect your funds.
It's possible. You must disclose life insurance policies in bankruptcy and could lose a valuable policy if you can't protect it with a bankruptcy exemption. Knowing the type of policy will tell you a lot.
You can almost certainly keep a term life insurance policy in bankruptcy because they aren't worth anything until they pay out. You can't cash out early and receive a portion of what you've paid.
By contrast, you'll need to determine the current value of the whole life policy and protect it with a bankruptcy exemption. Your bankruptcy trustee will know this and expect you to present proof of its worth before the 341 meeting of creditors.
People in the insurance industry sometimes use terms like "matured" and "unmatured" when referring to insurance policies. But don't worry—they aren't terms you'll need to know or use in bankruptcy. Use the "Here's What You'll Report in Your Bankruptcy Petition" chart above to identify your bankruptcy responsibilities without using these terms.
Even though the terms aren't required, learning what they mean can be interesting.
The following chart explains your responsibilities while incorporating the two terms. Essentially, it's the same information we provided in the "Here's What You'll Report in Your Bankruptcy Petition" chart above, so use whichever chart works best for you.
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Unmatured Insurance Policy |
Matured Insurance Policy |
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Term Life Insurance Policy |
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Whole Life Insurance Policy |
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Most people face challenges when purchasing a car, renting housing, and opening bank accounts after filing for bankruptcy. This occurs because a bankruptcy filing can appear on a credit report for up to ten years. Fortunately, the impact on credit approval and other financial transactions lessens with time, and most filers' credit improves in a year to four years.
If you have a term life insurance policy before filing for bankruptcy and continue paying the premiums, it's unlikely you'll lose the policy. However, a whole life policy might be dissolved if you lose it in bankruptcy.
In either case, you'll want to check with the coverage provider before filing for bankruptcy. Whether a bankruptcy will affect your ability to get a new life insurance policy after bankruptcy will depend on the provider's qualification requirements.
Learn about rebuilding credit after bankruptcy.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
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More Bankruptcy Information |
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Bankruptcy Forms and Document Checklist |
Schedule C: The Property You Claim as Exempt |
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More You Might Like |
Should I Ignore a Debt Collector's Calls and Letters? How Much Debt Do I Need to File for Bankruptcy? Will I Lose All My Property If I File for Bankruptcy? |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.