Opinion
Case No. 10-60887-R.
March 24, 2011
Opinion Regarding Objection to Exemptions
I.
In 1988, Robert and Laura Schoof purchased reciprocal life insurance policies in the amount of $50,000 each from Northwestern Mutual Whole Life Insurance. The Schoofs filed for chapter 7 relief on June 29, 2010. Robert Schoof listed the cash surrender value of his policy as $20,522.26. Laura Schoof listed the cash surrender value of her policy as $18,274.55. The Schoofs claimed the policies exempt pursuant to 11 U.S.C. § 522(d)(7) in the amounts of $20,522.26 and $18,274.55, respectively.
The trustee filed an objection to the Schoofs' exemptions, arguing that the statute provides an exemption for the policy itself, but not the cash surrender value of the policies. The Schoofs responded that because the policies are unmatured they are entitled to an exemption for each, regardless of the value.
II.
Section 522(d)(7) permits a debtor to exempt "[a]ny unmatured life insurance contract owned by the debtor, other than a credit life insurance contract." According to the legislative history, the exemption "refers to the life insurance contract itself. It does not encompass any other rights under the contract, such as the right to borrow out the loan value. Because of this provision, the trustee may not surrender a life insurance contract, which remains property of the debtor if he chooses the Federal exemptions." H.R. Rep. No. 595, 95th Cong., 1st Sess. 361, reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6317.
The rationale for § 522(d)(7) was carried over from the Bankruptcy Act. See Brown v. Swartz ( In re Swartz), 18 B.R. 454, 456 (Bankr. D. Mass. 1982) (citing In re Fount-Wit Distribs. of So. Jersey, Inc., 4 B.R. 424, 427 (Bankr. D.N.J. 1980)). In order to exempt a policy under the Act, however, a debtor had to first pay the cash surrender value of the policy to the trustee. Swartz at 456.
On the other hand, § 522(d)(8) permits the debtor to exempt life insurance cash value:
The debtor's aggregate interest, not to exceed in value $11,525 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.
11 U.S.C.A. § 522(d)(8) (footnote omitted).
With the introduction of the Code, and adoption of § 522(d)(8), Congress indicated that it intended to allow debtors to continue to exempt life insurance policies, and, in addition, created a new exemption in the cash surrender value that had traditionally been turned over to a trustee as a condition of policy retention. In re Swartz, 18 B.R. at 456. While § 522(d)(7) "does not encompass any other rights under the contract," § 522(d)(8) allows for the exemption of dividends or interests accrued under a contract. See H.R. Rep. No. 95-595, at 361 (emphasis added); § 522(d)(8). It is through § 522(d)(8) that Congress has allowed for exemption of dividends and interests such as cash surrender value. In re Swartz, 18 B.R. at 456.
In re Steiner, 2010 WL 4687955, *4 (Bankr. D. Idaho Nov. 10, 2010) ("[A]ll that is exempted by § 522(d)(7) . . . is the life insurance policy itself, and not a debtor's rights under the policy. . . . If a debtor wishes to protect dividends or interests that have accrued under a policy, such as a policy's cash surrender value, he or she must claim exemption in that interest under § 522(d)(8)[.]"); see also In re Oxford, 274 B.R. 887 (Bankr. D. Idaho 2002).
Accordingly, the trustee's objection is sustained.