Many of my clients ask if they will lose their life insurance policy if they file for a New Jersey Chapter 7 or Chapter 13 bankruptcy. This varies based on the type of life insurance and the exemptions you have. Keep reading to learn how your life insurance is affected when you file for bankruptcy in New Jersey.
There are two types of life insurance policies, term life and whole life. Whole life policies have a cash surrender value or CSV. This means that the money may be taken and distributed by the bankruptcy trustee. Term life policies do not have a CSV and are payable only when you pass away.
It is imperative that you properly disclose all assets to make sure that the proceeds of the policy are exempt. A “Schedule B” form is used to list your insurance assets. You will list these assets in the personal property column on this form. I can guide you on this form to make sure your assets are exempt.
The following shows the current life insurance federal and New Jersey specific exemptions.
Federal: Life insurance proceeds are exempt if they have not matured. Under federal exemptions, you are allowed to exempt up to $12,625 in the cash value of your policy. Depending on the value of your other exemptions, you may also have a “wildcard” exemption of $13,100 to apply to the cash value.
New Jersey: Life insurance proceeds are only exempt if the policy prohibits proceeds from being used to satisfy the beneficiary’s creditors. This exemption can be very powerful as it is unlimited in amount.
Life insurance and filing bankruptcy are very complex. It is important to seek the consultation of an experienced bankruptcy attorney. As I have stressed in my previous blogs, a good bankruptcy attorney will review all these questions before you file. Contact me today to discuss all of your bankruptcy options.
