Your ability to keep insurance proceeds in a Chapter 7 bankruptcy depends on why you are entitled to the money and where you live. Different restrictions apply to accident and life insurance proceeds. State and federal law also impact the extent to which you can claim insurance proceeds as being exempt, or outside of your bankruptcy estate.
Read on for more information about when you can keep insurance proceeds in a Chapter 7 bankruptcy.
Keeping Your Property With Bankruptcy Exemptions
When you file Chapter 7 bankruptcy, everything that you own is potentially property of your bankruptcy estate. The Chapter 7 trustee can sell or liquidate assets included in your bankruptcy estate to raise money to pay creditors. You can protect specific assets from being included in your estate by claiming them as exempt. Exemption laws are intended to protect you and your family by limiting the extent to which your assets can be seized to pay claims of creditors.
Exemptions are governed by state and federal law. Section 522 of the Bankruptcy Code provides a list of exemptions available under federal law. Individual states can opt out of the federal exemption scheme. If you live in one of the 33 states that have opted out, your exemptions are governed, for the most part, by your state’s exemption laws. If you live in one of the 17 states that have not opted out, you can choose between using the federal exemption scheme or your state’s exemption laws.
You can learn more about how bankruptcy exemptions work, which states have opted out of the federal exemption scheme, which state exemptions you can use, and more, in our Bankruptcy Exemptions topic area.
Accident Insurance Proceeds
For insurance proceeds that you get because of an accident, there are two issues: when the accident occurred, and whether the proceeds are covered by a bankruptcy exemption.
When the Accident Occured
Insurance proceeds paid on account of a personal injury that occurs after your Chapter 7 filing are excluded from your bankruptcy estate. This means that ordinarily, you can keep insurance proceeds payable on account of a postbankruptcy accident regardless of whether they are exempt. However, if you are injured in an accident that occurs before you file Chapter 7, any insurance proceeds payable to you are property of your bankruptcy estate; you need to take the next step (figuring out if they are exempt or not), to determine if you get to keep them.
The key date is when the accident occurs, not when the insurance proceeds are paid. Only insurance proceeds attributable to an accident that occurred before your Chapter 7 filing are potentially part of your bankruptcy estate.
Are the Accident Insurance Proceeds Exempt?
Exemptions come into play when insurance proceeds are potentially part of your bankruptcy estate. If you live in a state that has opted out of the federal exemption scheme, you must follow your state's laws in claiming any exemptions. You can keep insurance proceeds payable to you only up to the amount that your state’s exemption laws allow. Some states have generous exemptions for insurance proceeds received on account of wrongful death or personal injury. Other states’ exemption laws are more restrictive. (To find out the exemptions in your state, visit our Bankruptcy Exemptions by State page.)
You can elect the federal exemption scheme if you live in a state that has not opted out. Under federal law, you can exempt:
- $22,975 received on account of personal injury (but not for pain and suffering or pecuniary loss).
- Insurance proceeds received on account of the wrongful death of a person who supported you as his or her dependent. The exemption is limited to the amount reasonably necessary to support you and your dependents.
- Insurance proceeds received to compensate you for loss of future earnings. The lost earnings can be for you or a person who supported you as his or her dependent. The exemption is limited to the amount reasonably necessary to support you and your dependents.
Federal law also permits a “wild card exemption” that can be used for any type of property, including insurance proceeds. The wild card exemption is $1,150, plus $10,825 of any unused homestead exemption.
Life Insurance Proceeds
The law is somewhat different with respect to life insurance. Life insurance proceeds are potentially property of your bankruptcy estate if you are entitled to them on account of a death that:
- occurred before you file Chapter 7, or
- occurs within six months after you file Chapter 7.
Exemptions also come into play when you are the beneficiary of a life insurance policy. State law determines the amount of your exemption for life insurance proceeds if you live in a state that has opted out of the federal exemption scheme. If you live in a state that has not opted out, you can elect to use the federal exemption scheme. Under federal law:
- You may exempt proceeds received under a life insurance policy that are reasonably necessary to support you and your dependents. The policy must be on the life of a person who supported you as a dependent.
- You also may utilize the “wild card” exemption – $1,225, plus $11,500 of any unused homestead exemption.
Other Considerations for Life Insurance Proceeds
A few other points to keep in mind:
Disclosure. You must include any claim to insurance proceeds as an asset in your bankruptcy schedules. Failure to disclose your right to payment of insurance proceeds can result in sanctions by the bankruptcy court. Among other things, the court may dismiss your Chapter 7 case or deny you a discharge for failure to disclose assets.
Trustee’s Right to Handle Claim. If you have not reached a settlement before you file Chapter 7, the trustee may take over the handling of any pending litigation. Generally, a trustee will take an active role in pending litigation only if there are likely to be insurance proceeds that you are not entitled to claim as exempt.
Court Approval of Settlements. Settlements of insurance claims after you file Chapter 7 require bankruptcy court approval. The court will approve a proposed settlement if it is entered into in good faith and is in the best interests of your bankruptcy estate. Ordinarily, your bankruptcy estate will not have an interest in a proposed settlement unless the amount to which you are potentially entitled exceeds any applicable exemptions.