A recently widowed, elderly woman qualifies for Chapter 7 under the median income/means test but is concerned that the Chapter 7 trustee will assert a claim on the $35,000 insurance proceeds she is expecting following the death of her husband. The woman needs to file a Chapter 7 to get rid of credit card and medical debt. Are the insurance proceeds exempt?
Here is my take: I read 44-13-100(11)(C) as the applicable Code section. The statute reads as follows:
A payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.
It appears therefore that the potential debtor must must qualify as a "dependent" and that the funds are "reasonably necessary" for her support.
I suspect that the question of whether she is a dependent will be a facts and circumstances test. I don't know what the case law says about this but my guess is that if the widow can show that she relied upon her husband for support then she would qualify as a dependent.
With regard to the "reasonably necessary" issue, I have been involved in several cases where a lump sum workers comp settlement of $75,000+ or a Social Security past due benefit check of $25,000+ was declared fully exempt based on the argument that the debtor would need this money for future medical care and to make up for loss of work capacity.
In all of these cases the bankruptcy judges were willing to exempt the full amount of the settlement. What we did was to make a math argument that the funds would be used for (1) regular living expenses, (2) future medical care (3) housing modifications, etc.
Here, I suspect that the prospective debtor could identify a monthly figure by finding out how much the debtor could expect to receive from an annuity if she took the life insurance proceeds and invested them or by dividing the settlement by the number of months left in her expected lifespan and plug that into her budget.
The bottom line – I think the debtor needs to be advised that there is some risk that her bankruptcy judge will find some of her life insurance proceeds non-exempt. I don't think that it is a big risk but there is some risk nonetheless. She also needs to be advised that this issue will probably have to be argued. My sense is that the US Trustee has been using the IRS as a model for addressing assets in Ch. 7 cases and in an IRS setting (Offer in Compromise or Installment Agreement) the insurance proceeds would be in play for the IRS. How much influence the IRS policies are having on the U.S. Trustees is an unknown.
Thanks to my colleague Scott Riddle for raising this interesting and relevant question for discussion. Scott and I frequently engage in e-mail discussions to brainstorm possible issues in cases and this blog post is derived from one of those discussions. Any errors in this analysis is mine alone. Scott publishes a very comprehensive and interesting blog called the Georgia Bankruptcy blog which I recommend to any lawyer or potential debtor who is interested in Georgia bankruptcy law.
[tags] insurance proceeds and Chapter 7 bankruptcy, life insurance proceeds and bankruptcy exemption, Scott Riddle, reasonably necessary for support of the debtor [/tags]