Probably the most widely used consumer bankruptcy exemptions for personal
bankruptcy filings in Chicago are outlined in the Illinois Code of Civil Procedure,
specifically 735 ILCS 5/12-1001 et al.
For us Chicago bankruptcy lawyers, bankruptcy software
simplifies the exemptions process by automatically recommending what it thinks
are the most appropriate exemption options for the selected category of
property. In my case, I entered my client’s whole life insurance policy into
the Schedule B. My software automatically prompted me to choose from a listing
of options. Out of the four exemptions recommended, only two were applicable.
One was the all familiar 735 ILCS 5/12-1001(f), and the other (actually the choice
highlighted by the software) was the obscure 215 ILCS 5/238. So I decided to do
some checking into this 215 ILCS 5/238 obscurity.
215 ILCS 5/238 is
titled “Exemption,” and is found under the very lengthy article titled “Legal
Reserve Life Insurance.” It provides as follows:
"(a)
All proceeds payable because of the death of the insured and the
aggregate net cash value of any or all life and endowment policies and annuity
contracts payable to a wife or husband of the insured, or to a child, parent or
other person dependent upon the insured, whether the power to change the
beneficiary is reserved to the insured or not, and whether the insured or his
estate is a contingent beneficiary or not, shall be exempt from execution,
attachment, garnishment or other process, for the debts or liabilities of the
insured incurred subsequent to the effective date of this Code, except as to premiums paid in fraud
of creditors within the period limited by law for the recovery thereof.”
This all sounds innocent enough. 735 ILCS 5/12-1001 even has similar language:
“Personal
property exempt. The following personal property, owned by the debtor, is
exempt from judgment, attachment, or distress for rent:
“(f)All
proceeds payable because of the death of the insured and the aggregate net cash
value of any or all life insurance and endowment policies and annuity contracts
payable to a wife or husband of the insured, or to a child, parent, or other
person dependent upon the insured, whether the power to change the beneficiary
is reserved to the insured or not and whether the insured or the insured’s
estate is a contingent beneficiary or not;”
So does Illinois have
two applicable life insurance exemptions? It turns out the answer is YES.
Both exemptions were discussed
by Chicago bankruptcy court Judge Sonderby in her 2008 opinion In re Shethi, 07 B 05886. In that case,
debtors originally claimed the exemption under the 215 ILCS 5/238. Subsequently, after some trustee objections,
the exemption was amended to the more common 735 ILCS 5/12-1001(f).
According to the
opinion, life insurance where the debtor is the insured can be exempt under
both Illinois statutes. However, 735 ILCS 5/12-1001(f) is the statute with more
breadth. First, the 5/12-1001(f) does not carve out an exception for “premiums
paid in fraud of creditors” as the 215 ILCS does, and second, the 5/12-1001(f)
does not limit its protection to the debts of the insured.
So, to sum up, Illinois
does have two applicable statutes under which the debtor can claim the life
insurance exemption. If you by chance fail to correct your software’s exemption
choice for life insurance before the petition is filed, in the typical case the
life insurance policy will still be protected.
