I recently discussed what happens to health-insurance policies in bankruptcy, so debtors might also be curious about what happens to the actual proceeds from insurance claims. With the health-care policy, the issue was the character of the agreement, but with proceeds, the question focuses on the money the insurance company pays to the debtor when a claim is successfully filed. Here, the salient issues are the kind of insurance claim, the timing of the event that triggered the claim, and then what exemptions are available.
Take one of the recognizable examples: insurance proceeds from a car accident. If the car accident occurs after the bankruptcy is filed, then the insurance proceeds will not become part of the bankruptcy estate. However, if the accident occurs before the bankruptcy, then the proceeds may end up in the bankruptcy estate. (Note that the timing of the payment is irrelevant.)
The exemptions available to debtors for insurance proceeds vary quite a bit between New York and the federal government. Debtors can certainly attribute insurance proceeds to wild-card exemptions. The federal exemptions give debtors $1,250 plus up to $11,850 in an unused homestead exemption, and New York gives debtors $1,100 if they do not claim a homestead exemption, plus the lesser of $5,525 or $11,025 minus their personal-property exemptions.
The federal exemptions also protect funds for payments in wrongful death actions, loss of future earnings, and up to $23,675 for personal injury claims. New York shields compensation to debtors who are victims of crimes, and up to $8,275 in personal injury claims to the debtor and people upon whom the debtor is a dependent (not including pain and suffering or pecuniary losses).
Where the type of claim matters is life insurance, which is one of the three post-petition assets that can be roped into the bankruptcy estate. Unlike an accident claim, the timing of the death that triggers a life insurance claim is relevant because the proceeds can become part of the bankruptcy estate if the death occurs within six months of the bankruptcy case’s filing. Debtors can use the federal exemptions to cover up to $12,625 in life insurance benefits and all insurance benefits when the debtor is a dependent of the beneficiary. New York gives debtors control over acceleration rights for life-insurance policies, and where the debtor is the holder of the policy the exemption is unlimited. Debtors are, of course, free to use the above-mentioned cash exemptions to protect life-insurance proceeds to the extent they are available.
It’s pretty clear that the federal exemptions better protect debtors when it comes to personal injury claims, but New York’s unlimited exemption for policyholders better protects debtors. If your financial situation is precarious, but an insurance payment is playing a role, then it’s worthwhile to strategize your case with an experienced bankruptcy attorney Brooklyn NY.
Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA