Forum Rules (Everyone Must Read!!!) (updated: 04/28/2015)

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borrowing from life insurance policy

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  • borrowing from life insurance policy

    I am getting ready to file. I want to borrow the cash value of our life insurance policy (3-4K) in order to pay for lawyer expenses, schooling, and household stuff. Can I get in any trouble doing this? The exemption for life insurance in my state is 25k. Any thoughts?

    thank you in advance.

  • #2
    Are you hiring an attorney? I dont think it is prudent to be borrowing any money prior to, during or immediately after, filing BK. One of the questions the trustee asked us was about my husband's life insurance policy and the cash value. He doesnt have whole life so we were safe. That is really risky. We did have to borrow money to pay our attorney and we had to do some serious explaining to the trustee why we did. If you have retained an attorney better ask.


    • #3
      Yeah, generally its not a good idea to borrow money in anticipation of BK. First, the payment to pay it back would not be an allowed expense (unless the payment will be made with the policies dividend).


      • #4

        I get what you both are saying. I'm just so desperate right now to drum up some cash and get this thing going. Now, I'm reading that you have to file by August 15 for the old BK law? No way I'll have the filing fee by then. Sept. 1 will be the closest I can get, and even with that ... if I don't borrow from policy, the mortgage is going to be late. What a pickle I'm in.


        • #5
          Finally got a hold of my lawyer and his answer was, yes, I can borrow this money. You're right. Probably not prudent. But husband needs to pay tuition. Kids need clothes and books for school. I need to pay the balance on the lawyer fees. Since he said yes, I think I'm going to do it.


          • #6
            My husband is borrowing from his 401k

            Me and my husband are in the same boat. We are borrowing from his 401k to pay the lawyer or the Mortgage.Yes, we will document everything and save all receipts. We also have cut off utilities that must be paid.


            • #7
              Denmarie, sorry about your situation. My utilities aren't cut off, but they are way behind. I will need to pay that up to date as well. Did you lawyer say to document all the money you spend out of this loan?


              • #8
                Yes, folks, keep receipts for the Trustee so you have valid proof of the expenses you paid (basic living expenses)......
                You should be okay doing that....trustee will probably accept it...

                I used my income tax refund to pay lawyer - trustee laughed....said okay....

                Keep us posted,


                "It's amazing the paths that our feet sometimes follow in life".

                My suggestions are from "personal experience" and research only. Do not consider this as legal advice. Each bankruptcy case is different.


                • #9
                  If you borrow from your 401k, you cannot include the repayment amount as an expense. That means the amount you withdrawal will be taxes, and you'll owe a penalty. That's about the worst thing you can do.

                  If you stop paying on your credit cards for a few months, that should give you plenty of money for a lawyer. If not, then you're really in trouble because that means you spend more than you earn even without paying credit cards, and you'll never get ahead.


                  • #10
                    Also, this thing about the Aug. 15th deadline, that isn't for everyone. You have till October 14th to file I believe. So as Lightning suggested, just stop paying your CC bills, and in a month or so, you should have what you need no?


                    • #11
                      Lightning and Whittio, my lawyer wants payment in full by Sept 1. I guess he's swamped. That really gives me just a month to do drum up the money. I know 401K money is taxed when borrowed, but I don't know about life ins. $.


                      • #12
                        I would think if you take out a "loan" right before filing bankruptcy, you'll have to pay it back. Especially in this case where you're borrowing from your own funds.


                        • #13
                          401k and pay back

                          Yes, I know we will have to pay this back as it will be automatically be deducted from my husbands check every two weeks. Already got it approved, just waiting for the check. It will be used to pay just the mortgage, current Doctor treatments and utilities. Yes we were advised to keep all receipts and not use it for anything but immediate needs


                          • #14
                            The repayment of the 401k loan will not be allowed as an expense. You'll be taxed and penalized.


                            • #15
                              The loan could cause problems for your insurance. It will be charged interest that will continue to grow and if you are forced to cancel the policy, it can be treated as income. The amount paid in is basis, the growth in cash value over the basis is taxable. If this policy pays dividends, they could be used to help pay back the loan. I've worked on some horrible policies that have 20yr loans in the 20k range because they were never paid back.


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