The 180-day rule applies to life insurance proceeds in a Chapter 7 case. But life insurance proceeds are often exempt, or protected.
Last time, we explained the 180-day rule about inheritances. If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is “property of your bankruptcy estate.” It’s counted as if it was your property at the time you filed, even though it wasn’t. (See Section 541(a)(5)(A) of the Bankruptcy Code.)
That means to whatever extent the inherited property isn’t covered by a property exemption, or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.
That 180-day rule also applies to life insurance proceeds, our topic today. (See Section 541(a)(5)(C) of the Bankruptcy Code.)
Most—but by no means all—people who file Chapter 7 “straight bankruptcy” can keep everything they own. That’s because everything they own fits within “property exemptions. These are protected categories of property, usually—but not always—with specific maximum value amounts.
For example, you may have available a vehicle exemption of $5,000. This allows you to keep a vehicle if it is worth no more than that. Or if you owe on the vehicle, you can have up to that much in equity (its value minus the debt).
Property exemptions can get complicated. There are often “wildcard’ exemptions that you can use on anything. Exemptions are often double the usual amount if you file a joint case with your spouse—but not necessarily. It’s not always clear what property fits within a particular exemption. Coming up with the value of your property isn’t always easy. Also, each state has its own set of exemptions, and these can be wildly different, even in adjoining states. In 19 states you can choose between that state’s exemptions or a set of federal ones. In the rest you must use the state’s exemptions. And you have to live in a state for a certain length of time or else you have to use what’s available in a prior state.
“Property of the Bankruptcy Estate” and “Property Exemptions”
It’s actually a two-step process to determine whether you get to keep everything you own.
The first step is whether it is “property of the bankruptcy estate.” If something is not “property of the estate,” it doesn’t come under bankruptcy jurisdiction. You don’t need to exempt it. If something is “property of the estate” you need to fit it within an available exemption. Otherwise the Chapter 7 trustee could take it, liquidate it, and pay the proceeds to your creditors.
Then the second step is whether something that IS “property of the estate” is protected by a property exemption.
Are Life Insurance Proceeds “Property of the Estate”?
What if someone dies before you file a Chapter 7 case leaving you money in life insurance proceeds? To the extent any of that money is still around, it’s “property of the estate.” (Be sure to talk with a bankruptcy lawyer before trying to dispose of such money before filing bankruptcy. That can be dangerous if done without competent legal advice.)
If you haven’t received the insurance proceeds at the time of filing, it would all be “property of the estate.” That’s because you are legally entitled to it even if it hasn’t arrived yet.
What if someone dies seven months after you file your Chapter 7 case, leaving life insurance money? The life insurance money is NOT property of the estate. Why? Because you did not “acquire or become entitled to acquire” the life insurance benefits “within 180 days after” filing bankruptcy.
What if someone dies within 180 days after you file your Chapter 7 case? As just implied, the life insurance proceeds would be “property of the estate.”
Are Life Insurance Proceeds Covered by a Property Exemption?
IF your life insurance proceeds ARE property of your bankruptcy estate, they may still be exempt. It depends on your state. It often also depends on your relationship with the decedent. The amount of proceeds may also matter.
For example, if you qualify to use the federal exemptions you can exempt funds from a life insurance policy that insured the life of someone of who you were a dependent so long as the funds are “reasonably necessary” for your support and that of any of your dependents.
In contrast, a number of states exempt unlimited amounts of life insurance proceeds to a spouse or dependent.
So, whether the life insurance coming to you are exempt really depends on which exemption laws apply to you.