That depends on what exemptions you have available under applicable non-bankruptcy law. Exemptions are determined based on where you resided for the 2 years prior to filing your bankruptcy case. If you lived in more than one state during those 2 years, then it is based on where you lived for the greater part of the 180 days prior to that 2 year period.
I doubt any state has an exemption that covers $40,000 in cash surrender value in a whole life insurance policy, but you need to consult with an attorney who can go over all the relevant facts in your case to make that determination.
You can keep any asset in a Chapter 13 case, but you need to pay out over time at least as much as your creditors would get if you filed a Chapter 7 case.
Mark J. Markus, Attorney at Law
Handling exclusively bankruptcy law cases in California since 1991.
Life insurance is an asset in Bankruptcy. If you file Chapter 7 and this asset is not exempt, most likely the Trustee will cash it in & use the money to pay your creditors. If you file Chapter 13, and this asset is not exempt, you will need to pay your unsecured creditors the entire value of this asset (or the portion that isn't exempt) over the term of the Plan.
In reviewing the Virginia exemptions, I see that group life insurance is exempt, so if your policy is part of a group, you won't have any problems. But if not, you will want to consult with an experienced Bankruptcy attorney for specific advice on how to get the most value out of your exemptions.
If you are subject to Virginia exemptions (i.e., if you have lived in Va. for at least 2 years), you will not be able to claim the full life insurance cash surrender value as exempt (assuming this is a private policy and not, for example, a Veterans Life Insurance policy or some other specially protected type of policy). It will be taken by the trustee in a 7 (but we can usually protect the difference between the loan value and the surrender value, so you can do a policy loan to pay the trustee and retain the policy for the purpose of the death benefit). In a 13, you will need to pay the non-exempt value into the plan, but that is not in addition to the disposable income requirement (you pay the greater of the Chapter 7 liquidation amount or the disposable income amount), so you can normally retain the life insurance policy.
The State of Virginia has exempted the property and income below from seizure by the bankruptcy court to pay creditors:
Real Property: Real property up to $5,000; can add $500 per dependent; proceeds from sale of exempt property are also exempt (must file homestead exemption before filing bankruptcy) [34-4 and 34-6]
Personal Property: Must be a householder to claim any personal property exemption. Estate sale proceeds up to amount of unused real estate exemption [34-20]; tools, books and instruments of trade including motor vehicles, up to $10,000 total [34-26]; bible, unlimited amount [34-26(1)]; wedding and engagement rings, unlimited amount [34-26(1)(a)]; family portraits and heirlooms up to $5,000 total [34-26(2)]; burial plot, unlimited amount [34-26(3)], up to $1,000 worth of clothing [34-26(4)]; household furnishings up to $5,000 [34-26(4)(a)]; pets, unlimited amount [34-26(5)]; health aids, unlimited amount [34-26(6)]; motor vehicle up to $2,000 [34-26(8)]; farm equipment including up to $1,000 worth of fertilizer, two horses, two mules and gear, two plows, pitchfork, rake, wagon, drag, harvest cradle, two iron wedges and tractor valued up to $3,000 [34-27]; personal injury recoveries, unlimited amount [34-28.1]; uniforms, arms and equipment required for military use [44-96]; crops, unlimited amount [8.01-489]
Insurance / Annuities: Cooperative life insurance benefits, unlimited amount [38.2-3811]; benefits from fraternal society, unlimited amount [38.2-4118]; group life insurance policy or proceeds, unlimited amount [38.2-3339]; government group life or accidence insurance, unlimited amount [51.1-510]; burial benefits, unlimited amount [38.2-4021]; accident or sickness benefits, unlimited amount [38.2-3549]
Pensions / Retirement Plans: 75% of earned but unpaid pension payments (low income debtors might be allowed to keep more) [34-29]; employees of cities, towns and counties, unlimited amt [51.1-802]; retirement benefits up to $17,500 per year [34-34]
Public Benefits / Entitlements: Unemployment compensation, unlimited amount [60.2-600]; workers' compensation, unlimited amount [65.2-531]; aid to blind, aged, disabled, and families with dependent children and general assistance, unlimited amount [63.1-88]; crime victims' compensation, unlimited amt but not if debt for treatment of injury incurred during crime [19.2-368.12]
Wages: 75% of earned but unpaid wages [34-29]
Miscellaneous: Any property for disabled veteran homeowner up to $2,000 [34-4.1]; business partnership property (check statute for current exemption) [50-25]
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Disclaimer: This answer does not constitute legal advice. I am admitted in the States of New York, New Jersey and Massachusetts only and make no attempt to opine on matters of law that are not relevant to those three States. This advice is based on general principles of law that may or may not relate to your specific situation. Facts and laws change and these possible changes will affect the advice provided here. Consult an attorney in your locale before you act on any of this advice. You should not rely on this advice alone and nothing in these communications creates an attorney client relationship.
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