On an issue where the courts disagree, Bankruptcy Judge Roberta A. Colton of Orlando, Fla., ruled that life insurance proceeds received more than 180 days after filing belong to the chapter 13 estate, unless the case has been dismissed, closed or converted.
A husband and wife confirmed a chapter 13 plan in 2014. When the wife died early this year, the couple were current on their plan payments. The beneficiary on his wife’s life insurance policies, the husband dutifully amended the schedules to add the insurance proceeds. He claimed they were not property of the estate under Section 541(a)(5) and were exempt under Florida law if they were estate property.
The husband lost on both scores in Judge Colton’s June 28 opinion.
If Section 541(a)(5) were the only governing law, Judge Colton said the proceeds would not have been estate property. That subsection expands estate property to include life insurance proceeds that a debtor becomes entitled to acquire with 180 days of filing. Since the wife died more than 180 days after filing, that subsection, standing alone, would exclude the proceeds from the chapter 13 estate.
Judge Colton said that Section 1306(a) expands the definition of estate property “even further” to include property the debtor acquires “after commencement of the case but before the case is closed, dismissed, or converted.” Employing Section 1306(a), Judge Colton followed the majority of courts and ruled that the insurance proceeds should go to the chapter 13 trustee for distribution to creditors. “[L]egislative history and the structure of chapter 13 support the majority view,” she said.
Courts in the majority include the Ninth Circuit Bankruptcy Appellate Panel.
A minority of courts, Judge Colton said, exclude such insurance proceeds from a chapter 13 estate on the theory that the more specific statute, Section 541(a)(5), governs over the more general provisions in Section 1306(a).
Judges in the Middle District of Florida, where Judge Colton sits, have been on both sides of the issue.
Under Florida law, Judge Colton also ruled that the proceeds were exempt only from claims against the wife but were subject to claims of the husband’s creditors or their joint creditors.
Judge Colton was careful not to criticize the husband for attempting to keep the insurance payout: “The insurance proceeds are hardly a windfall when viewed in terms of his loss.” She noted how the debtor’s counsel informed the court that the husband would dismiss or convert his case to chapter 7 if the proceeds were included in the chapter 13 estate.