Bankruptcy, Death, and Avoiding Fraud Charges

Photo courtesy of Ken Mayer

If you are contemplating filing for bankruptcy in order to get your financial affairs squared away, you more than likely have a plethora of questions about the nitty-gritty details of the Bankruptcy Code. Without the help of an experienced bankruptcy attorney, the many provisions and sections of the Bankruptcy Code will set your head spinning for sure.

As you delve deeper into the filing process, you will eventually come across a provision known as the “windfall provision” of the Bankruptcy Code. This provision can be found in section 541(a)(5), and states as follows, “from 180 days after the bankruptcy filing date, the bankruptcy estate includes any bequest, devise, or inheritance; property distribution as a result of a property settlement from a divorce proceeding; and proceeds as a beneficiary of a life insurance policy or other death benefit.”

If that sounds like a bunch of confusing legalese to you, let us translate the meaning of section 541(a)(5) into English.

Although in a Chapter 13 bankruptcy filing, the context of the windfall provision is more complex, in a Chapter 7 filing, which most of our individual clients pursue, this provision allows for unforeseen circumstances regarding income and/or other monies that come your way after you have filed for bankruptcy.

As there is extremely close monitoring on bankruptcy cases, you cannot give a friend or family member loads of your freed up cash, only to have them return the money after the bankruptcy has been filed. This is known as fraud and will be punished quite severely. Attempting to outsmart bankruptcy laws will only end badly for you. However, there are instances where you may come into money after you have filed for bankruptcy that are perfectly legal and legitimate.

Suppose a close relative of yours passes away soon after you have filed your bankruptcy with the New Jersey Court system. The question many of our clients ask is, “Will I have to surrender any inheritance or life insurance proceeds I receive after I have filed for bankruptcy?”

Any result of a life insurance payout will be subject to the bankruptcy estate under section 541(a)(5). However, the New Jersey exemption plan allows that any proceeds you may receive it from a term life policy would be fully exempt from collection by your creditors or by the deceased’s creditors.

Such a life insurance policy would be exempt from collection only as reasonably necessary to allow continued support and life maintenance of you and any of your dependents. In other words, if you receive boatloads of money that hugely exceed your financial needs, your chances of keeping it all…..are slim. The good news, though, is that you will more than likely get to keep at least some of the proceeds.

Any proceeds that were left to you in a will become full property of the bankruptcy estate in the amount that were not protected by exemptions. To learn more about how to handle the proceeds of a Last Will and Testament after recently filing for bankruptcy, it’s advisable to be in close contact with your bankruptcy attorney so he can walk you through the correct procedures, in order to avoid inadvertently committing fraud. For help today, call our office, or even better, like us on Facebook and your consult is Free with Veitengruber Law.

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