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Bankruptcy Court Clarifies Scope of Exemptions for Life Insurance Policies

In re Zerbi, Bankr. W.D. Mich., Jan. 6, 2011 (Case No. 09-14649, Hon. Scott W. Dales)

A recent decision from the Bankruptcy Court for the Western District of Michigan provides some practical guidance for debtors and their attorneys about exempting unmatured life insurance policies.

In In re Zerbi, the debtor owned and was the insured under a life insurance policy. The policy had both a "cash value" or investment component and an insurance component. When the debtor filed his Chapter 7 case, the insurance policy had a cash surrender value of approximately $19,248.02. The debtor claimed exemptions in the policy under sections 522(d)(5) (the "wildcard" exemption), 522(d)(7), and 522(d)(8):

  • 522(d)(7) allows a debtor to exempt "[a]ny unmatured life insurance contract owned by the debtor, other than a credit life insurance contract."
  • 522(d)(8) provides an exemption in "[t]he debtor's aggregate interest, not to exceed in value $11,525 . . . in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent."

The trustee objected, arguing that the cash surrender value could not be exempted under 522(d)(7) and that the debtor did not have sufficient exemption room available under 522(d)(5) or (d)(8) to exempt the entire value.

After reviewing the statutory language, legislative history, case law from other bankruptcy courts, the Court concluded that "Congress drew a distinction between the insurance contract itself – which the Debtor may exempt 'in-kind' without any limitation based on the debtor's aggregate interest or value – and the other benefits under an unmatured insurance contract, which the debtor may exempt up to specified values." Id. at 4. Those "other benefits" include a cash surrender value, along with any borrowing rights or dividends.

Put simply, the debtor may exempt the life insurance policy itself under 522(d)(7), but not the debtor's rights or benefits under the policy. The debtor must use 522(d)(8) to exempt those rights or benefits, and 522(d)(8) limits the exemption to a certain dollar amount (presently $11,525). The Court reasoned that allowing the debtor to exempt the cash surrender value under 522(d)(7) would render 522(d)(8) "meaningless." Id. at 5.

Debtors' attorneys may wish to review this case when advising clients about whether the cash value of a life insurance policy can be protected in a particular bankruptcy case. 

Categories: Chapter 7, Western District of Michigan

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practice focuses on bankruptcy, municipal law, collections, and trial-level and appeals litigation. In the bankruptcy arena, she represents primarily Chapter 7 trustees. Laura has handled a wide range of trial and appellate matters for individual and business clients and has appeared before the U.S. Sixth Circuit Court of Appeals, the Michigan Court of Appeals, and the United States Bankruptcy Court for the Western District of Michigan, as well as Michigan circuit and district courts across the state.

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