Life Insurance Payout

[Foofy610]

Here's a tricky one... as I mentioned in a previous post, we're filing a 100% CH13 on August 31st. We're trying to find ways to feel a bit more secure until we can build an emergency fund. Our attorney has already said we can accept a cash gift from my in-laws for $3,000. We have enough personal property exemptions to cover it. However, my wife has more than that built up in her life insurance policy. Honestly, I really don't want the gift from my inlaws.

She spoke with the insurance company. They said she never had to repay the amount if she didn't want to. Do you think there will be an issue with taking $3,000 from her policy after we file? Technically, it wouldn't be a loan.

[justbroke]

If this is a cash value (whole life) insurance policy, the Trustee may or may not be interested in it. However, it does have a value and will need to be disclosed. Chapter 13s are much much much different from Chapter 7s when it comes to scrutinizing your assets and property that you wish to keep. So long as you're paying as much to the unsecured creditors as the value of your "non-exempt" property, it doesn't matter.

Additionally, you can protect a certain amount of property with your exemptions. I'm going to assume that you're taking the Federal Exemptions over the Pennsylvania exemptions and you can exempt a cash value policy to $9,300 as far as I know. Additionally, there is a really nice "wild card" exemption if you're not protecting the equity in a homestead.

I don't think it will really be a factor in this particular case; but I also don't know what your Chapter 13 will look like (as far as disposable monthly income).

So go back to the attorney and ask if you have enough from the insurance policy exemption to cover the cash value of the insurance policy. If so, then you are good to go. Even if not, you can still keep the policy, but just make sure you pay the value over the lifetime of the plan. I'm sure your attorney would be happy to explain it to you.

[Foofy610]

This is confusing. Our attorney said converting the cash value would actually be deemed as income, and that would require us to re-do our means test. Therefore, it would negatively affect the bankruptcy filing. Considering we're at 100% payback, how can we possibly pay more?! Maybe I'm missing something??

[jange]

Even though you are paying 100%, the tt could raise your monthly payment which would result in you being paid off in less than 60 months. It is all about your dmi, and if you can afford to pay more each month.

[LadyInTheRed]

This is confusing. Our attorney said converting the cash value would actually be deemed as income, and that would require us to re-do our means test. Therefore, it would negatively affect the bankruptcy filing. Considering we're at 100% payback, how can we possibly pay more?! Maybe I'm missing something??

You have to pay all of your disposible income to the trustee during the life of the plan. If you are already paying 100% of allowed unsecured claims, any increase in income would help you complete the plan early. So, you may pay more per month, but you won't pay more over the life of the plan.

[LadyInTheRed]

I can't believe I took over 6 minutes to type that!

[forgotten]

If I am not missing something, why do anything? It doesn't sound like you actually need any money right now.
Work at saving up a fund by cutting back after you file and worry about how to get more cash if you NEED it later.

[Foofy610]

If we were to cash in the policy after we filed, would the trustee be notified in any way?

[justbroke]

This is confusing. Our attorney said converting the cash value would actually be deemed as income, and that would require us to re-do our means test. Therefore, it would negatively affect the bankruptcy filing. Considering we're at 100% payback, how can we possibly pay more?! Maybe I'm missing something??

I don't know how this would be income. Perhaps the interest earned is income, but not the principle. It's no different than having money in a timed deposit account (e.g. CD) and cashing it in. I don't understand why your attorney thinks it's "income" unless the attorney was talking about the "gain" -- or interest earned -- on the payments you made into the policy. Besides, there is over $10K of exemptions in the Federal exemption scheme for this.

If you're in a 100% payback, you won't need to pay more "monthly" than your "disposable monthly income" (DMI).

I think there is too much worry on this topic. I don't agree with your attorney that it's "income"... it's just an asset. But I will add that Florida is MUCH more sympathetic on this issue than Pennsylvania, since we probably get most of Pa's retirees!

[Foofy610]

Well... I sent my attorney a message to ask her how the life insurance payout would have a negative affect. Hopefully, she'll get back to me Monday morning.

[Foofy610]

Due to Hurricane Irene, our backs are against the wall. A cluster of trees in our backyard were damaged during the hurricane. They were going to have to come down in the near future anyway. I actually included a work estimate in my CH13 paperwork. My inlaws were going to give us a gift to help with the cost. Unfortunately, they were hit to, so the funds have dried up. The only way we can get the trees taken down is to tap my wife's life insurance policy.

Our attorney already said any withdrawal would be considered income. However, we're not going to be withdrawing the cash every year. That being said, if our income is going to increase this year, thus increasing our plan payment... will our plan payment decrease when next year when there is no cash withdrawal?

I hope I explained that well enough.

[jange]

You would probably need to apply for a modification, in PA I doubt it would happen automatically. I received a bonus right after we filed, (and yes that is income) while bonuses or the $ amount, at my company are not guaranteed. I had to disclose it at the 341 meeting and the trustee required us to submit an adjusted plan to include the additional income. Once confirmed, we have only heard from the trustee once and that was the annual statement he sends out in January. Assuming we may be in the same district, since we were also hit by Hurricane Irene, the trustee does not require us to submit any type of income statements
or tax returns. My attorney said he has the right to ask for them, but rarely if ever does.

19 payments made!

[Foofy610]

Supposedly, my wife would not receive a 1099 tax form if she only withdrawals what she paid into the policy. Off the record, would there be a need to disclose the funds?

[justbroke]

Personally I would press the attorney on why insurance life proceeds -- already exempted -- are "income". Of course, different Districts may act differently, but I don't see how it's income... it's more like savings (with accrued interest).