We want to file a Chapter 7 bankruptcy, but my spouse is terminally ill.  What happens if my spouse passes away before our Chapter 7 bankruptcy case is over?

Property that you become entitled to acquire by inheritance within 180 days of your Chapter 7 bankruptcy filing is property of your bankruptcy estate.  This means that the Chapter 7 Trustee appointed in your case has the power to administer any property that you inherit from your spouse if your spouse does not survive for more than six months following the bankruptcy petition date.  The Trustee will liquidate and distribute the inheritance to your creditors if it is not protected by an exemption.

That said, if you and your spouse have been married for a number of years, then it’s likely that all assets are jointly owned or community property, and become property of the bankruptcy estate on the date of filing anyway.  Property that you owned and was exempt on the petition date remains protected.   But there is a potential problem if you are the beneficiary of your spouse’s life insurance policy because the proceeds of the policy, which didn’t exist on the filing date, become property of the bankruptcy estate in the event your spouse passes away within the six month period.

Whether this creates a problem for you in a bankruptcy case where the Arizona exemptions apply depends upon the nature of the insurance policy and amount of the proceeds.  Arizona has an unlimited exemption for proceeds from a life insurance policy under an employer.  As such, if your spouse has a group life insurance policy, you are entitled to keep all of the proceeds despite your spouse passing away within six months of filing.  However, if your spouse has a life insurance policy that was not obtained through an employer, but rather privately, then Arizona law places a cap of $20,000 on the exempt amount.  Therefore, should your spouse not survive the six month period, you are entitled to keep $20,000, and the Trustee may administer all life insurance proceeds in excess of that amount.

If you or someone you know is facing an issue such as this, please feel free to call me directly at (480) 344-0981 or you can email me at tperez@davismiles.com