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:
It's essential to understand how the two primary life insurance policies differ before filing for bankruptcy.
It would be unusual to worry about a term policy in bankruptcy. However, whole life policies are different because of their value. You'll need to determine whether you can protect a whole life policy's cash value and any funds received as a beneficiary in bankruptcy.
You must report all of your property on bankruptcy forms, including the value of life insurance policies and funds received as a beneficiary. You won't lose the property in bankruptcy as long as an exemption covers it.
Each state decides what its citizens can exempt, so you'll start by reviewing your state's bankruptcy exemption statutes. Some states let filers choose between the state exemptions and the federal exemption scheme. You'd pick the system that would protect the most assets.
Many states have exemptions that will cover a life insurance policy, but they each have different requirements. You'll want to review your state statute carefully. If your state doesn't have a specific exemption, look for a wildcard exemption that you can use to protect any property of your choosing.
The bankruptcy court will look to the date you received the life insurance funds when determining the exemption status.
Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.
The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.
More Bankruptcy Information
We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.
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 consulting with a local bankruptcy lawyer.