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Filing for bankruptcy can have a direct influence on any life insurance policy you try to secure; so, does getting life insurance after bankruptcy hold true? Your eligibility will depend on several factors, including your financial history. Life insurance carriers see current or past bankruptcies as a risk because it suggests that you may be unable to pay your future policy premiums. 

What does this mean?  It means to prepare yourself for what you might experience before signing on the dotted line.  This could entail anything from your life insurance application being denied or postponed, higher premiums, fewer policy options offered, and limited to temporary life insurance versus securing a permanent life insurance policy.

Some insurance carriers only offer limited coverage if your bankruptcy hasn’t been discharged. Others may offer you full coverage.

Granted, buying life insurance after bankruptcy might be frustrating as well as daunting, however, there are still many options available.

That said, both bankruptcy and life insurance protect you in your absolute worst-case scenarios.  In order to create your best situation, it’s imperative to familiarize yourself with what bankruptcy is, the different types there are, and your options for life insurance after bankruptcy.

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What Bankruptcy Does

What bankruptcy can do is help a person by discarding debt or making a plan to repay debts. A bankruptcy case normally begins when the debtor files a petition with the bankruptcy court. A petition may be filed by an individual, by spouses together, or by a corporation or other entity.   

All bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code.

Bankruptcy Types

There are different types of bankruptcies, which are usually referred to by their chapter in the U.S. Bankruptcy Code.

  • Chapter 7 or Chapter 13Individuals may file either of these depending on the specifics of their situation.
  • Chapter 7 or Chapter 11Businesses may file bankruptcy under Chapter 7 to liquidate, or Chapter 11 to reorganize.
  • Chapter 9Municipalities — which entails cities, towns, villages, taxing districts, municipal utilities, and school districts.
  • Chapter 12: This provides debt relief to family farmers and fishermen.
  • Chapter 15:  Bankruptcy filings that involve parties from more than one country.

Bankruptcy Benefits + Risks

It’s important to know the benefits and the risks associated with filing bankruptcy. There are several types of bankruptcy, and depending on specifics of your situation, is the Chapter you would file under.

Chapter 7:  This chapter of the Bankruptcy Code provides for “liquidation” – the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors. Bankruptcy governs the process of liquidation under the bankruptcy laws of the United States and is the most common form of bankruptcy in the United States. 

Chapter 13:  This chapter of the Bankruptcy Code provides for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.

Since Chapter 13 is not as severe as Chapter 7, you may be able to successfully apply for life insurance before the bankruptcy has been discharged. In some cases, life insurance carriers will only offer “limited” life insurance coverage (in the event your Chapter 13 bankruptcy hasn’t been discharged) other insurance carriers may offer you “full” coverage.

Chapter 9:  This chapter of the Bankruptcy Code provides for reorganization of municipalities, which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.

Chapter 11:  This chapter of the Bankruptcy Code generally provides for reorganization, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in Chapter 11.

Chapter 12:  This chapter of the Bankruptcy Code provides for adjustment of debts of a “family farmer,” or a “family fisherman” as those terms are defined in the Bankruptcy Code. Specifically, with “regular annual income” as it enables financially distressed family farmers and fishermen to propose and carry out a plan to repay all or part of their debts.

Chapter 15:  This chapter is a new chapter added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  The purpose of Chapter 15, and the Model Law on which it is based, is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country.

Life Insurance After Bankruptcy

A bankruptcy won’t keep you from getting life insurance, but remember, your insurance premiums may be higher since your insurance carrier considers you riskier to insure. 

Typically, the further out you are from your bankruptcy discharge, the lesser the impact on your rates.

Some insurance carriers only offer limited coverage if your bankruptcy hasn’t been discharged. Others may offer you full coverage. In some cases (again, depending on the carrier) you may have to wait to secure a policy. 

What a Bankruptcy Discharge Means

This is where it can get a little confusing, so stay with me.  A “bankruptcy discharge” releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged.

The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts.  This includes legal action and communications with the debtor, such as telephone calls, letters, and personal contact.  Here, you’re home-free. 

But here’s the twist.  Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.

Life Insurance Exemptions in Bankruptcy

Each state has its own exemption laws. There is also a set of federal exemptions. In some states, you’re allowed to use either the state or federal exemptions. You must stick with one set or the other, meaning — you can’t mix and match.

Other states have opted out of allowing you to choose which exemptions to use. There are currently 31 of these “opt-out” states. If you’ve lived in an opt-out state for at least two years, you must use that state’s exemption laws. If you’ve lived in an opt-out state for less than two years, you must use the federal exemptions.

Under the federal exemptions, you can claim up to $14,875 of your policy’s cash value as exempt. The policy must meet two criteria to qualify for this exemption. First, you (the debtor) must be the policy owner. Second, the insured must either be you or someone who can claim you as a dependent.

If your policy’s cash value is greater than $14,875, you may be able to combine this exemption with the federal wildcard exemption. As of April 1, 2022, the federal wildcard exemption is $1,475 plus up to $13,950 of any unused portion of the federal homestead exemption. (If you’re married and filing a joint bankruptcy, you can double these amounts.)

You’ll need to check your state exemption statutes to determine whether your state has a wildcard exemption and if it does, how much you can protect.

If your state’s exemption laws don’t include an exemption specifically for life insurance, you may still be able to protect your policy’s cash value with other exemptions, such as your state’s personal property, cash, or wildcard exemptions.

Finally, if you become entitled to receive life insurance proceeds as a beneficiary within 180 days after you file for bankruptcy, the proceeds are a part of your bankruptcy estate

What this means is that your trustee can take these proceeds — unless you can claim them as exempt.  So, whether proceeds are exempt depends on which exemption laws you are using.

Bankruptcy Guidelines by Insurance Type

Applying for life insurance after bankruptcy is doable but be advised that each carrier has different requirements, as well as varying lengths of time to have passed after a bankruptcy discharge.  The carrier(s) will decide on a case-by-case scenario, and will take into consideration your financials, personal health, and family health history information as well.

Temporary (Term) Insurance Permanent Insurance
-Will consider after 2 years of discharge.
-Multiple Bankruptcy Filings – Will consider after 5 years of discharge from last bankruptcy.
-Chapter 11, 12 and 13 – Once debt payments are being made, can consider with debt schedule and complete financials. 
-Chapter 7 – If discharged <12 months ago, prospect must be working full-time and provide a paystub. 
-Multiple Bankruptcy Filings – Will consider after 2 years of discharge from last bankruptcy.
-Chapter 7 – Postpone until fully discharged.
-Chapter 11 and 13 – Require a payment plan to be in place, gainfully employed, financially justified, consideration will be given. 
-Chapter 7 – Postpone until fully discharged.
-Chapter 11 and 13 – Require a payment plan to be in place, gainfully employed, financially justified, consideration will be given. 
-Not Applicable (N/A)-Will consider with full financials including payment schedule.
-Please contact insurance carrier on each potential case.-Please contact insurance carrier on each potential case.
-Need to be discharged for at least 1 year – 2 years if self-employed.  In addition, the insured must be employed in the same job for 2 years (3-years if self-employed).-Need to be discharged for at least 1 year – 2 years if self-employed.  In addition, the insured must be employed in the same job for 2 years (3-years if self-employed).
-Chapter 7 – Postpone until fully discharged.
-Chapter 13 and other types – individual consideration.
-Chapter 7 – Postpone until fully discharged.
-Chapter 13 and other types – individual consideration.
-Chapter 7 – Postpone until fully discharged.
-Chapter 13 – New insurance may be considered (pre-discharge) on an individual using income replacement factors in Chapter 13, after carefully reviewing the total life insurance already in force and applied for, and net available income left after filing. 
-Chapter 13 – Individual must have regular employment and amount of debt (secured and unsecured) must not exceed a stated maximum amount.
-Multiple Bankruptcies – Will be subject to 2-5 year waiting period. 
-Chapter 7 – Postpone until fully discharged.
-Chapter 13 – New insurance may be considered (pre-discharge) on an individual using income replacement factors in Chapter 13, after carefully reviewing the total life insurance already in force and applied for, and net available income left after filing. 
-Chapter 13 – Individual must have regular employment and amount of debt (secured and unsecured) must not exceed a stated maximum amount.
-Multiple Bankruptcies – Will be subject to 2-5 year waiting period. 

Though, the life insurance carriers above aren’t specifically named, you get the gist of the varying parameters, as well as their individual requirements before a life insurance application can be submitted.

There you go — now you are familiar with all the information surrounding your opportunities for securing life insurance after a bankruptcy. Hopefully, you will feel more confident should you need to secure a life insurance policy after declaring bankruptcy. There are many options out there to help you find what you need!

Taking Control of Your Financial Future

After filing for bankruptcy, it’s normal to want to secure both your short-term and long-term financial future.  But you’ll also want to safeguard yourself against the unexpected financial hardships. 

If working on your finances is one of your goals right now (or, maybe it’s been a goal for some time), I suggest starting with the Making Cents Count Financial Organizer.

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  • Guidance to track your legal documents, tax information, and permanent records
  • Markers to know when you should meet with an attorney to establish a will or trust
  • Templates, checklists, and step-by-step actions
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Once you get your budget rolling, check out my post on 6 Simple Steps to Get Financially Organized. This post also includes a helpful checklist available in my Resource Library (free to access).

Admittedly, this particular checklist has a larger-scale focus on your overall financial picture, but I genuinely feel that getting your finances organized is essential.

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