Bankruptcy & Term Life Insurance

Chapter 7

• In a Chapter 7 bankruptcy case, the debtor has few assets with which to pay off creditors. However, the debtor must offer something to his creditors, so a trustee will be appointed in each Chapter 7 case. The trustee has the job of examining the debtor's assets, collecting those assets that can be sold, selling those assets and using the proceeds to pay off the debtor's creditors. The trustee cannot sell exempt property, however. Each state has its own set of exemptions, but some states allow debtors to take federal exemptions.
  
  

Exemptions

• The bankruptcy code allows for exemptions to keep debtors afloat after going through the bankruptcy process. According to Jrank, "exemption statutes generally permit the debtor to keep such things as a home, a car, and personal goods like clothes. Although exemptions inhibit the creditor's ability to collect debts, they relieve the state of the burden of providing the debtor's basic needs."
  
  

Exemption Laws

• The bankruptcy code specifies unmatured life insurance policies as property of a debtor that is exempt from being sold to pay off his creditors. Laws on exemptions vary from state to state, so you need to check your state laws to find out if your term life insurance will be exempt and if there would be a limit to the amount of life insurance you would be allowed to claim as an exemption.
  
  

Term Life Insurance

• Term life insurance provides death protection for a stated term or limited amount of time. Term life insurance can give the decedent's family the ability to pay for expenses after his death, such as medical bills, estate taxes, burial costs, the mortgage, day care, school tuition, debt repayment and elder care. Lawmakers know this, so when developing the federal bankruptcy code, they included life insurance contracts as an exemption. Whole life insurance involves a term life policy combined with an investment component. Whole life insurance builds cash value that can be borrowed against. Because of that added cash value, a whole life insurance policy could possibly fall into the nonexempt category. Again check, your state and federal laws for more information.
  
  

Policy

• If a person cannot provide for his family in the event of his death, then the state will have the burden of providing for that family. The state would rather leave the responsibility of supporting members of a family to actual family members than to place that burden on the taxpayers. Therefore if a debtor has a term life insurance policy in place before filing bankruptcy, that policy will be exempt.