Serious illness often leads to mounting medical and credit card debt. If you need a Chapter 7 bankruptcy and you or your spouse are terminally ill, then you may be wondering what might happen in the event of death before the bankruptcy case is over. A question that often comes up is can the Chapter 7 bankruptcy trustee take control over and administer property inherited from a deceased spouse for the benefit of your creditors?
Property acquired by inheritance within 180 days of the petition date is property of the bankruptcy estate. Therefore, should one of you pass away within six months following the bankruptcy filing, the Chapter 7 Trustee can distribute any inheritance the other spouse is entitled to receive unless it is protected by an exemption. The property you own on the petition date is commonly jointly owned or community property, and therefore already property of the bankruptcy estate and usually exempt. However, life insurance proceeds belonging to the surviving spouse as a beneficiary are a new asset that didn’t exist on the petition date and may be taken by a bankruptcy trustee if there is no exemption to protect them.
The good news is that Arizona has an unlimited exemption for proceeds from a life insurance policy through an employer. Therefore, if the deceased spouse had a group life insurance policy, the surviving spouse beneficiary keeps all of the proceeds. But for life insurance policies that are privately owned and not an employer benefit, Arizona law limits the exemption to $20,000. This means the surviving spouse gets to keep the first $20,000 in proceeds and the bankruptcy trustee can administer the rest.