If nothing else, the case we have been talking about should convince everyone that bankruptcy is not a do-it-yourself proposition. One state’s law may not only differ from bankruptcy laws in other states, but it may differ from the federal Bankruptcy Code as well. Worse yet, states may adhere to federal laws on some parts of bankruptcy but not on others.

As we’ve said, the rules of exemptions for Chapter 7 bankruptcy, specifically the rules for exempting a life insurance payout following the bankruptcy filing, are at the center of this case from Idaho. The debtor maintained that the debt should not be included with the bankruptcy state. The trustee disagreed. The appellate court sided with the debtor, but the decision was not easy to make.

In Illinois, the life insurance payout is exempt if the deceased is a near relative. In Idaho, it is almost impossible to determine if the payout is exempt, because the statute is so confusing. Remember: Petitioners in Idaho are subject to state law, not the federal code.

In its current form, Idaho’s life insurance exemption statute is a single sentence. Easy enough, right? Not if that sentence is 284 words long. The court of appeals had some harsh words about the language — including many “whether or not” and “provided that” clauses — but was able to find some sense in it.

In this case, the statute did answer the question. What if the question were not about a life insurance benefit but the cash value of a life insurance policy? Both whole and universal life insurance policies build cash value over time, and it is possible to cash in on the cash value. While there are down sides to what is essentially a loan, the major plus is that the withdrawal comes tax-free.

The question, then, is how to handle that cash value in a bankruptcy? It depends on where you are filing your petition.

Bankruptcy law is more nuanced than some people think it is. An experienced attorney can guide you through the subtleties of the process here in Illinois and help you achieve the best outcome for your circumstances.

Source:  Forbes.com, “The Amazingly Confusing Life Insurance Exemption From Creditor Claims,” Jay Adkisson, April 11, 2015