Issues with life insurance are a bit murky in bankruptcy filings. It is important to understand the nature of the debtor’s interest, vs other parties’ interests. Who is the owner of the policy? Who are the beneficiaries of the policy? Is there cash value? These issues require discussion at some length and review of policies to get them listed correctly in the schedules.
A recent case out of the North Carolina bankruptcy court is an excellent primer on some of these issues. In Hardin v. Harrison, 2021 WL 61665 (Bankr. E.D.N.C. 2021), the court discussed a situation where a debtor changed the beneficiary under a policy on the eve of filing bankruptcy (chapter 11 converted to a chapter 7). The trustee challenged the transfer as a fraudulent conveyance.
Changes in a Policy Before Bankruptcy
Right before filing, a husband debtor changed the beneficiary under a life insurance policy he owned from his former employer to his wife. The cash value was over $800,000, so this was a sizable amount worth fighting over. The cash value was claimed as exempt under the North Carolina state exemption laws. The trustee challenged the transfer as a fraudulent conveyance.
The Court undertook a thorough analysis of North Carolina insurance law, noting that the parties “missed the mark” on the issues, with the “precise question” being whether the debtor had an interest in property which was transferred. Since the debtor had the right under the policy itself to change beneficiaries, and the debtor owned the unmatured life insurance policy, the court found that “neither the ownership nor the right under the policy to change the beneficiary designation was transferred.” Fraudulent transfer claims denied.
Fraudulent Transfer Does Not End Analysis
However, the Court went on to note that an exemption objection was still pending. “The propriety of changing the qualities and characteristics of property just prior to filing a bankruptcy petition is the subject of an objection to exemption and many reported decisions exist for guidance.”
Eve of Filing Transfers into Exempt Property
Yes, there are many cases on this point. The problem is that the test is basically a smell test, with the standard of “pigs being fed and hogs being slaughtered.” Less than a “bright-line standard, and very fact specific. Any and all transfers on eve of filing will be examined. Whether a debtor wishes to take the risk is really the question, and the judge is the ultimate decision maker. This debtor was an $800,000 risk taker, and time will tell what happens.
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