The general rule is that once a person has filed for bankruptcy, no one is allowed to take the debtor’s money or property for any reason. This allows a person breathing room and time to sort out their finances. However, there is an important exception for a debtor with a life insurance contract.
11 U.S.C. 542(d) states the following:
(d) A life insurance company may transfer property of the estate or property of the debtor to such company in good faith, with the same effect with respect to such company as if the case under this title concerning the debtor had not been commenced, if such transfer is to pay a premium or to carry out a nonforfeiture insurance option, and is required to be made automatically, under a life insurance contract with such company that was entered into before the date of the filing of the petition and that is property of the estate.
That long paragraph essentially says that a life insurance company is allowed to take money from a debtor in his or her bankruptcy. This even though almost everyone else is not allowed to take any of the debtor’s money.
The reason why 542(d) exists is that Congress recognizes that life insurance is an important part of life. The failure to make required payments on a life insurance policy is always grounds to terminate the policy. Thus, there is a carve-out that allows a debtor to maintain his or her life insurance policy through the bankruptcy case.
If you have an active life insurance policy, it is important that you tell your bankruptcy lawyer. It is also a good idea to make contact with your insurance representative or insurance company to make sure they continue to debit your account. After all, you don’t want to lose your important life insurance policy.
If you have questions about life insurance and Chapter 7 Bankruptcy, you can call Sacramento Bankruptcy Lawyer Rick Morin at (916) 333-2222.