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Archive for the ‘life insurance proceeds’ tag

“Property of the Estate” May Include Life Insurance Proceeds

June 2nd, 2017 at 7:00 am

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.)

“Property Exemptions”

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.

 

5 Special Assets

December 12th, 2016 at 8:00 am

Here are five ways that bankruptcy can involve assets you used to own, may own in the near future, or you own only a share of.

 

 

Special Assets in Bankruptcy

For the last several blog posts we have been focusing on special kinds of assets in bankruptcy. What makes them special?

Most of the time when you file a bankruptcy case you are trying to keep what you own. With most kinds of things you own, the focus is on what you own on the date of filing the case. That’s what is under the jurisdiction of the bankruptcy court, especially in a Chapter 7 “straight bankruptcy” case.  

But with these five special kinds of assets, it’s not enough just to look to the date of filing. Sometimes the bankruptcy system can reach backward in time, to involve something you used to own. Sometimes assets that you don’t own at filing but own later can be affected. Or sometimes the court even has jurisdiction over assets in which you don’t even know you have ownership rights.

Here’s a helpful summary of these special assets.

1) Inheritance and Life Insurance Proceeds

If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance—through the death of the person from whom you are inheriting—then the property being inherited is counted as if it was your property at the time you filed. Same thing with assets coming through life insurance—this same within-180-days rule applies.  (Section 541(a)(5)(A) and (C) of the Bankruptcy Code.) So, whatever you inherit or get through someone’s life insurance within 180 day after filing counts as yours at filing.

2) Shared Assets

Any property you hold jointly or in common with someone else is under the jurisdiction of the bankruptcy court. That is, your share in that property is—not the other co-owner’s share. This is most obviously a concern when are married and file bankruptcy without your spouse. Your share in the marital assets is part of what you own.  Same thing with your share in any present or past businesses, whether you were actively or only passively involved. It’s especially easy to neglect business or personal co-ownership situations where you weren’t closely involved, and may not remember or possibly not even know about your ownership share.

3) Fraudulent Transfers

Be careful about assets you sold or gave away without being paid “a reasonable equivalent value in exchange” for what you sold. (Section 548(a)(1)(B)(i) of the Bankruptcy Code.) This can happen two ways. You can’t sell or give away assets “with actual intent to hinder, delay, or defraud” your creditors. (Section 548(a)(1)(A).) You can’t purposely hide your assets from your creditors by getting rid of the assets. But even without any such fraudulent intent, a constructive “fraudulent transfer” can happen. You get “less than a reasonably equivalent value in exchange for such transfer or obligation,” while being insolvent. (Section 548(a)(1)(B).) It’s not good to be selling or giving away assets without getting paid enough when you aren’t paying your debts. If you do during the two-year period before filing bankruptcy, the transaction can be undone and the asset brought back into your case.

4) Rents and Profits

Your assets for bankruptcy purposes don’t just include the present value of your assets at the time of filing. They also include the subsequent “[p]roceeds, product, offspring, rents, or profits of or from” those assets. (Section 541(a)(6) of U.S. Bankruptcy Code.) So even if an asset has little or no present value, a bankruptcy trustee may still be interested in it because of the rents and profits it could generate. However, this does not include payment for your labor done after you file your bankruptcy case. The Bankruptcy Code explicitly excludes “earnings from services performed by an individual debtor after the commencement of the case.” (Section 541(a)(6).)

5) Divorce Property Settlements and Decrees

The within-180-day rule about inheritances and life insurance proceeds in paragraph 1) above also applies to property gotten through divorce. So your bankruptcy case includes whatever you “acquire or become entitled to acquire” in the 180-day period after filing that case “as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree.” (Section 541(a)(5)(B).)

Conclusion

Most people who file bankruptcy can keep everything they own that they want to keep. That’s usually because all of their assets are “exempt”—protected from their creditors under bankruptcy. Assets can also be protected other ways.

But when you consider what assets you own and how to protect them, you can’t always just be looking at what you possess on the date of filing your case. Be sure to consider the above five ways that bankruptcy can also involve assets you used to own, may own in the near future, or you own only a share of.

 

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