Attorney for Bankruptcy in Anderson Finds Two Different Answers About Insurance

May 18, 2012 1:07 am Published by

As every good bankruptcy lawyer in Indiana knows, the law is no static listing of rules.  Instead, bankruptcy laws are constantly evolving in courtrooms.  Sharing some of these case with my Bankruptcy in Indiana readers can help clarify the basic principles of bankruptcy and how those play out in real world situations.

Since I actually helped create the exemptions portion of the new bankruptcy laws in Indiana, I was especially interested in two court cases that had to do with insurance policies. There are reasons a debt consolidation lawyer like me needs to know quite a bit about insurance, and how both the policies and the premiums people are paying for them relate to filing personal bankruptcy in Indiana.

The debtor in the first bankruptcy court case, which happened in Wyoming, was a Mr.  N.

  • N. was filing under Chapter 13 bankruptcy law, which involves a debt repayment plan. N. owned a whole life insurance policy.
  • The bankruptcy trustee questioned the premiums N. was paying, thinking that whatever income N. had coming in over his basic living expenses should be applied towards paying is creditors.
  • The court said that “whole life policies are savings devices and not necessary for an individual’s basic living expenses”, and, because N. was an above-median income debtor, did not allow him to claim the premiums as a necessary expense in his plan..

By way of providing full Indiana bankruptcy information, I want to add a couple of my own comments about this case.

  • When life insurance has a cash value (as Mr. N’s policy did), that is property. However, you’ll notice the court did not require Mr. N. to cash in his policy and use that money to pay his debts. Why not?  Because, like retirement plan money, life insurance cash values are exempt in bankruptcy.
  • At the same time, the court wanted Mr. N. to cut back more on his own lifestyle expenses in order to have enough money to pay the monthly premiums and still make payments to the creditors.

The second insurance-related bankruptcy case also happened in Wisconsin, but this one involved a disability insurance policy.

  • A couple, S. and K., filed bankruptcy Chapter 7.
  • The husband owned two disability policies with a total cash value of $7,777.
  • While the bankruptcy trustee initially questioned whether the premiums the couple was paying qualified as an exemption (for the same reasons as the court had questioned Mr. N.’s plan), the final ruling was in favor of the couple.
  • The court ruled that “individuals should be encouraged to provide for their own subsistence needs should they become disabled and unable to work”

It’s a common bankruptcy myth that if you file bankruptcy, “you’ll lose everything.” Debtors who file individual bankruptcy in Indiana find out that the process is meant to be as fair as possible to all parties, to them AND to their creditors. Can you see how each of the judges was trying to do exactly that?



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This post was written by Mark Zuckerberg

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