Will You Lose Your Life Insurance While Filing for Bankruptcy?
Just as the United States Congress recognizes, life insurance is a necessity for financial stability in life for every citizen in the USA. For encouraging family planning, the government has offered tax benefits in life insurance and made it exempted from creditors. It offers death benefits in the case of passing. While filing for bankruptcy, are you worried that you will lose it? Our Pittsburgh bankruptcy lawyer is here to answer this question.Are Life Insurance Proceeds Exempt in Bankruptcy?
When the debtor files for bankruptcy, all the possessions, and assets are considered as the bankruptcy estate that can be liquidated for paying off the debts. However, Bankruptcy Code and state and federal law offer some protection to the assets that are called exemptions.
Listen under schedule C, your life insurance will be considered as the exempt asset for the debtor, hence cannot be used for paying off the debts. The exempt property and assets will enjoy partial or full protection from bankruptcy while the non-exempt belongings will be used for paying off the debt. Our Pittsburgh bankruptcy lawyer can help you deal with this.
Depending on which state you are in and what exemption you are choosing, you will get to know whether your life insurance can be exempted or not. If you are choosing state exemptions in Pennsylvania, your life insurance will be exempted if the beneficiaries are your spouse, child or dependent relatives.
If you are opting for federal exemption, life insurance proceeds can be exempted if they are not matured. In this case, you will get an exemption of $12,625 of loan value on your policy.
If you are filing for Chapter 7 bankruptcy and you inherit life insurance in 180 days, then you are not going to get an exemption on it. It will automatically become a part of the bankruptcy estate. But if you are getting this life insurance as your inheritance after 180 days of filing bankruptcy, then you can get an exemption on it.Whole Life Insurance Vs. Term Life Insurance in Bankruptcy
Whether you will get an exemption on your life insurance or not depends on what type of life insurance you have. For example, if you have term life insurance, it only insures the person’s life. However, whole life insurance is more of a cash investment.
For bankruptcy filing, term life insurance has no financial value. However, it has to be listed as an asset. Whole life insurance on the other hand offers monetary value in the debtor’s bankruptcy filing. While the federal exemption can offer partial protection of it, the bankruptcy trustee will decide what to do with the part of non-exempt equity of whole life insurance.
That is why you need to get the assistance of an experienced Pittsburgh bankruptcy lawyer to understand how much your life insurance will get affected in the bankruptcy filing.
In this case, you need to keep in mind that even if you are confident that your life insurance value will be non-exempt, yet you need to document it at the time of filing for bankruptcy in the Schedule B used for personal properties.Life Insurance Policy After Bankruptcy
While we have already discussed the effect of bankruptcy on your life insurance, it is also necessary to consider whether you are going to get another life insurance after the bankruptcy is discharged.
Filing for bankruptcy will have its effects on your personal finances. Now, after the bankruptcy is discharged, you might not get life insurance immediately. For Chapter 7 Bankruptcy, you will have to wait 1-2 years for getting life insurance. When you are filing for chapter 13, there is no typical period that you have to wait, but you will be charged with higher premiums for the life insurance.
If you are looking for more information on bankruptcy, then come to us at Pittsburgh Bankruptcy Law Group today.