Let's say that husband and wife filed for Chapter 7 bankruptcy relief to discharge $80,000 of credit card debt. A week after they filed for bankruptcy husband dies. In schedule B of their bankruptcy petition, they list a $100,000 term life insurance insuring the life of husband with wife as beneficiary. The question is who has the right to get the $100,000 life insurance proceeds, the wife or the Chapter 7 trustee? This is an interesting question, isn't it? You have the wife who is mourning the death of her beloved husband who obviously got the insurance so his wife could have $100,000 when he died. And then there is the trustee who wants to get the $100,000 so he can use that to pay their creditors. Is there any justice in this world? I mean, does a debtor literally owe creditors his life insurance proceeds when he dies?

This issue was placed squarely to the test in Bierbach, Trustee v. Walck in Re Ronald and Sharon M. Walck. In this case, the debtor husband died six days after he and his wife filed for Chapter 7 relief. At the 341a meeting of creditors, the wife testified that she was entitled to receive a $100,000 life insurance benefit on her husband's life. The trustee told her that the $100,000 should be paid into the bankruptcy estate subject to any appropriate exemptions. The applicable exemption is Section 522 (d)(11)(C) which exempts "a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonable necessary for the support of the debtor any dependent of the debtor;". We already know what the trustee is going to say, right? He is going to argue that Mrs. Walck does not need the $100,000 for her support to challenge her claim of exemption. What a Grinch. No relation to Newt.