Insurance Proceeds Received After Filing Bankruptcy

The bankruptcy estate extends to assets acquired after the filing of the petition in the case of money inherited from an estate, a trust, or an insurance policy on the life of a deceased relative. Most debtors are surprised when the trustee ask them to turn over money the acquired after filing bankruptcy because the general rule is that debtors may retain money earned or received after the filing date.

I recently represented a client whose father passed away a shortly after the child’s bankruptcy. The debtor found that the father had made the debtor a beneficiary of a life insurance policy, and the debtor testified about the policy at the trustee meeting. When the trustee made demands for the insurance proceeds the debtor resisted by giving a series of excuses why the debtor could not get the insurance proceeds. After a few months of requests and excuses the trustee filed an adversary complaint to deny the debtor a bankruptcy discharge and for an order to turnover all the insurance proceeds. A week later the debtor got the insurance money and paid the trustee. In fact, the trustee was interested in the turnover of the amount of insurance proceeds to pay creditors. The trustee did not require that the entire policy benefit be tied up in the bankruptcy proceeding and permitted the debtor to keep some money over an above the claim amount for the debtor’s personal expenses.

The point of the story is that insurance proceeds received within the initial months after bankruptcy filing are part of the bankruptcy estate under the law. This provision of the law is designed, in some part, to prohibit someone from filing bankruptcy when they anticipate a recovery from an estate so as to deprive their creditors of claims they might otherwise have when the debtor received said proceeds.

posted by Jonathan Alper, bankruptcy attorney, Orlando, Florida