Legal Question in Bankruptcy in Kentucky

In order to receive a SBA loan for a business in Michigan (which later failed ) we had to assign a portion of our life insurance policy to xxxx bank. We also had to add them to our home and our condo in FL. Long story short we had to file bankruptcy. House and condo were lost back to the banks. We have been told that xxxx will not be able to be taken off our life policy as it is secured. I was under the impression that the debt was discharged. Can they do this? Also is interest compounding on this supposedly government backed loan? Can I cancel the policy? It expires 2016 as it is a term policy.


Asked on 11/08/09, 3:15 pm

1 Answer from Attorneys
Gregory Napier Troutman & Napier, PLLC

Secured debts are treated differently in bankruptcy than unsecured debts. There are some intricacies that I won't get into here, but a secured debt is not discharged to the extent that there was value in the collateral. However, I know of no reason that you would be required to continue to pay on the life insurance policy. Their security interest is contingent in that they would only realize it if you did die and the policy was in force. Your personal responsibility on the debt is extinquished. So, if the value of the collateral is zero (like an expired life insurance policy) then the value of their security interest is also zero and so the the debt is zero. It does not matter is interest is accruing or not if the collater is worth less than the principal.

The real question is whether you can get another life insurance policy that would provide you the same coverage as your unassigned portion for the same or less cost.

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Answered on 11/13/09, 3:38 pm


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