As with all bankruptcy questions, it’s important to seek advice from a bankruptcy lawyer. Whether you will be entitled to keep your life or accident insurance payments if you declare bankruptcy can depend on where you live, why you received the money, and state and federal laws.
Bankruptcy Exemptions and protecting accident insurance proceeds
If you file Chapter 7 bankruptcy a trustee is assigned to your case and can sell and liquidate your assets which are considered part of your bankruptcy estate. Some assets are not considered part of your estate because they are considered “exempt” by either state or federal bankruptcy laws.
Exemptions are governed by state and federal law. Section 522 of the Bankruptcy Code provides a list of exemptions available under federal law. Some states have decided that they will “opt” out of the federal bankruptcy exemptions and have instead created their own state bankruptcy exemption laws.
Whether your injury insurance is part of the bankruptcy estate will depend on when the accident occurred and whether the monies are covered by your state’s bankruptcy exemption laws.
The accident occurred after the Chapter 7 bankruptcy filing
If the personal injury occurred after you filed Chapter 7 bankruptcy and your case has been dismissed they are not included in your bankruptcy estate. This means that any proceeds you receive you would be able to keep.
What if the accident occurs before the chapter 7 bankruptcy filing? If you received money before you filed for chapter 7 the money could be considered part of your bankruptcy estate if it is not exempt. So the next step is to determine if the proceeds are exempt or not.
Determining if the Accident Insurance Proceeds Exempt?
So how do you know if your insurance proceeds are exempt? You will have to determine if your state uses the state or federal bankruptcy exemptions. Some states have very generous exemptions for personal injury compensation, others do not. For ease of discussion we will address when insurance proceeds are exempt under federal exemption laws.
Under federal law, you can exempt:
- Up to $22,975 received on account of personal injury. Pain and suffering or pecuniary loss not included.
- Insurance proceeds received on account of the wrongful death of a person who supported you as his or her dependent.
- Insurance proceeds received to compensate you for loss of future earnings.
If the above does not protect all of our insurance proceeds you may also be able to use what is termed a wild card exemption which can be used to protect insurance money.
Are life insurance proceeds protected?
What if you are the beneficiary of a whole life or term life policy and that person dies while you are in bankruptcy? Then the proceeds of the life insurance policy are part of your bankruptcy estate. For instance, if your cousin dies and leaves you $100,000, this money is considered part of the estate. If all of your debts are paid and there is money remaining you are entitled to the remaining balance. What if you get life insurance within 180 days of the bankruptcy filing date? It is also money of the estate.
Fortunately, there are also exemptions provided for life insurance. If you are able to use the federal bankruptcy exemptions the following applies:
- You may exempt proceeds received under a life insurance policy that are reasonably necessary to support you and your dependents. The policy must be on the life of a person who supported you as a dependent.
- You also may utilize the “wild card” exemption – $1,225, plus $11,500 of any unused homestead exemption.
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