In a Chapter 7 Bankruptcy, what generally occurs is that a debtor’s assets are liquidated and the proceeds of the sale go to the repayment of their creditors. However under both Federal Law and State Law a debtor can claim a number of exemptions based on the type of assets that are being liquidated. Under New Jersey Law a debtor can elect to choose either state or federal exemptions. Such a choice can have a vastly different effect on the outcome of the debtor’s bankruptcy. To illustrate I will explain the differences when claiming an exemption of life insurance proceeds.
The Federal Statute that determines the exemption of life insurance is 11 U.S.C. 522 (d)(11)(C).This statute allow the debtor to exempt life insurance proceeds “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” This means that a debtor can exempt an undefined amount of life insurance proceeds depending on how much they need to support themselves or their dependents. This rule is subject to interpretation by the court and could leave the debtor with the full value of the policy, none of the policy, or anything in between. However the New Jersey exemptions would have a very different outcome if elected. N.J.S.A. 17B:24-6 would allow a debtor to claim the full amount of the life insurance policy of the insured free and clear of any of the insured’s debts or the beneficiary’s debts. This rule is not subject to the same limitation set forth in the Federal Statute, and if elected could result in a much larger exemption then that allowed under Federal Law.
There are many different types of exemptions that are offered through both Federal Law and State Law. It may be often be difficult or confusing at times to determine which exemptions are right to select. Depending on how you choose you could get a very different result in the amount of assets that are exempt from your creditors. Essentially what all of this means is a debtor must determine what assets he has left and what exemptions will provide him with the largest amount in retained assets. It is these exemptions that will determine how much of the debtors assets will stay out of the hands of their creditors.