Is The Cash Value of My Life Insurance Policy Protected If I File Bankruptcy in New York State?

27 Oct Is The Cash Value of My Life Insurance Policy Protected If I File Bankruptcy in New York State?

Until recently, it was unclear whether cash value in a life insurance policy was protected if a joint bankruptcy was filed in New York State. Up until about a year or so ago, it wasn’t an issue. The cash values of life insurance policies were seen as exempt as long as there was a beneficiary named in the policy. Then some Chapter 7 Trustees in the Western District of New York began challenging the exemptions taken by debtors if their spouse was the beneficiary and if the spouse was a co-debtor in the bankruptcy. Some Bankruptcy Court judges agreed with the trustees. One case, In re Wornick, was appealed to the 2nd U.S. Circuit Court of Appeals.

In the Wornick case, both husband and wife had life insurance in their name with the other listed as beneficiary. Each policy had a cash surrender value and was claimed on Schedule C of their bankruptcy petition as exempt. The trustee objected and the bankruptcy court agreed with the trustee. The case was appealed to the District Court which affirmed the Bankruptcy Court’s decision. The Second Circuit reversed. They found that New York Insurance Law Section 3212 protected each spouse’s interest because while the cases were filed jointly, they were not consolidated. Therefore, each debtor had their own estate. The Court stated, “The trustee may not reach assets in a joint filing that he could not have reached had the spouses filed separately.”

The 2nd Circuit ruling assures that the cash value of a life insurance policy is exempt in New York as long as the policy lists a beneficiary, even if the beneficiary is the joint debtor.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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