Dear Bankruptcy Adviser,
My husband and I are considering bankruptcy. We live in California and one of our children is disabled and will need care after we pass away. We set up large life insurance policies for him and for each of us in case of anyone’s death. We are so afraid to declare bankruptcy because what we have read doesn’t let you keep very much insurance after you have filed. We are not in great health now and know it would be impossible to get insurance in the million dollar range to protect him. Should we still declare bankruptcy? How much can be protected in California? We have used every resource including all equity to stay afloat, but can no longer maintain the bills. Thank you so much for any advice.
— Chris

Dear Chris,
Chris, you and your husband are right to consider bankruptcy. Clearly, you must be able to continue making payments on your life insurance policies in order to protect your son. Those payments are commitments just like your mortgage or monthly payments to the power company. They are of the highest priority.

Here’s a piece of good news — you may be wrong about your ability to keep your insurance once you’ve filed. Most life insurance policies do not have a cash-surrender value, meaning it’s not an asset that you can redeem before the “maturation date.” Most life insurance policies only become assets when the conditions are met, in this case, upon your death. If you aren’t sure what kind of policy you have, consult the paperwork that came with the policy or call the company — it’s important information and not that hard to find out.

There are other options besides bankruptcy. You can opt for credit counseling or debt negotiation. If you have a lump sum of money, you might hire a negotiator with a proven track record of settling cases like yours. If you know for sure that you can afford the credit counseling monthly payment AND that ALL your creditors will be paid, you might be one of the 25 percent of people who successfully complete a credit counseling program.

However, I recommend talking to a reputable bankruptcy attorney and pursuing your options under Chapter 7 or Chapter 13. A good attorney should also have the ability to negotiate a settlement if you have the funds available for that. Most bankruptcy attorneys will provide a free consultation to determine whether you qualify, so before you go in, have the following information ready:

  1. What investments do you have? Qualified retirement accounts are protected up to $1,000,000. Stocks, bonds and other investments may be at risk.
  2. How much equity do you have in your house? If you have too much equity in your house then Chapter 13 will be your only bankruptcy option.
  3. How many cars do you have paid in full or nearly paid off? Know the year, make and model of all your vehicles.
  4. How much money do you have left over after your fixed bills: rent, water, power, car and car insurance payments?

If you have to choose, I think you absolutely must pay your insurance policy premiums before you pay credit card bills. When benefits eventually are paid out, the surviving spouse will need that money to care for your son. You ought to eliminate the debt while you can so that every penny is available for your son’s needs. Otherwise, you will simply have to struggle for years to continue making monthly credit card payments, while racking up more and more debt only to have that debt paid with the future life insurance proceeds.

Finally, Chris, I thank you for being financially responsible. You and your husband are trying your best to be of value to your son in life and beyond. Bankruptcy protections are necessary for our society because they help folks like you who are devoting time and energy to doing the right thing.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “Bankruptcy” as the topic.