Expert: Terry Leeders - 6/28/2008

Question
In chapter 7 bankruptcy, we were told that the cash value of our whole life policy would not be seized because it's less than the exemption. My wife is not working and she just found out that she has lupus. We are months behind in our bills (about 8) and are in the process of filing bankruptcy. Because of the 6 months rule for the means test, we do not meet the requirements of  Chapter 7. However, we will in a few months. We are starting to incur medical bills (mostly for prescription medicine for my glaucoma, my daughters asthma and my wife's lupus) and we need money. If we take a loan out on our whole life insurance policy, would that have to be reported as income?

Answer
As this is cashing out an asset, it would not be considered income for the means test...you are just 'borrowing' or using your own money, like withdrawing from a checking account or CD.  You should check with your tax preparer, as it could be taxable, but otherwise, it wouldn't be income in the bankruptcy.  Also, you want to work with your attorney regarding how to spend down what you cash out, as you are changing the nature of the asset, and may lose your exemption when you convert the asset to another type.  Payments to any creditor that exceed $600 need to be disclosed in your petition.