If you are filing a joint bankruptcy with your spouse and your spouse dies during the bankruptcy process, this could impact your case in several ways. One of the most important consequences of the death of a filing spouse during bankruptcy is that the life insurance benefit payout cannot become part of the bankruptcy estate. For example, if you and your spouse filed bankruptcy in January 15, 2010 and your spouse passed away on January 17, 2010, the life insurance benefit payout you receive will not become part of the bankruptcy under the Texas bankruptcy code.
Under Texas bankruptcy law insurance benefits cannot be seized to pay the debts of the beneficiary or the insured even if the beneficiary can be changed. The Texas bankruptcy law will not allow this exemption if 1) the creditor is trying to cover insurance premium payments fraudulently made by the debtor filing for bankruptcy; or 2) if the creditor is attempting to foreclose on its interest in the policy or if the policy was used to secure the debt of the beneficiary or insured.
However, depending on the circumstances, the life insurance payout may not be completely exempt during bankruptcy. For example, if you have a whole life insurance policy and cash it as the “owner” of the policy, not the insured or the beneficiary, it may become part of the bankruptcy estate. Please speak with your bankruptcy attorney before you cash in any insurance policies before or during your bankruptcy. Your bankruptcy attorney can work with you to protect this important asset during your bankruptcy.