02 Jul 2018

Exempt property—life insurance policies


2 min

What if I use it to buy a home?

Section 116 of the Bankruptcy Act 1966 prescribes what property is available to creditors, and what is not. Property that is unavailable upon bankruptcy is described as ‘exempt property’.

Section 116(2)(d) of the Bankruptcy Act states that policies of life insurance held by the bankrupt and/or their spouse or de facto partner are exempt property where the proceeds of such policies are received on or after the date of bankruptcy.

On a recent Worrells administration, the question arose as to whether the proceeds of a life insurance policy (from the bankrupt’s deceased husband) used to purchase real property in the bankrupt’s name, is exempt property, or whether that is deemed as ‘after acquired’ property and therefore available to creditors under section 58(3) of the Bankruptcy Act.

The answer lies in the definition of exempt money and protected money. Under section 116(2D), protected money includes exempt money, and exempt money includes the proceeds of life insurance policies—received on or after the date of bankruptcy.

However, the critical section is section 116(3) of the Bankruptcy Act, which effectively states that any property purchased with protected money is unavailable to a bankruptcy trustee to realise. And section 116(2)(n) of the Bankruptcy Act specifically includes such property as exempt property. But timing is important. Remember the exemption only applies to the life insurance policy proceeds received on or after the date of bankruptcy—not before. If received before bankruptcy and are sitting in a bank account or used to purchase real property they are not afforded the protection of being exempt property and will be available to creditors.

So, to answer the question: yes, if the property was purchased with the proceeds of a life insurance policy it is protected from a bankruptcy trustee, if the purchase is made after the date of bankruptcy.

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