This content was published prior to the combination of Dentons Sirote. Learn more about Dentons Sirote. 

I have been lecturing recently on the biggest mistakes that loan offices and their customer service representatives (CSRs) make. Topics include many of the subjects that this blog addresses, including (i) Unfair, Deceptive or Abusive Acts and Practices, (ii) Marketing, (iii) Bankruptcy, (iv) Credit Reporting, (v) Debt Collection, (vi) Credit Decision Making, (vii) Addressing Complaints and Disputes, and (viii) the Handling of Audits and Examinations.

One item that has surfaced in my presentations concerns how credit insurance policies are addressed in Bankruptcy. Often when a debtor files for Chapter 7 or Chapter 13 bankruptcy protection, a “triggering” event in connection with an underlying credit insurance policy has not occurred. So, what happens when that event does occur post-filing? Is the recovery of proceeds on a credit life, disability, involuntary unemployment or collateral protection policy an asset of the debtor’s estate, or do the proceeds belong to the beneficiary of the credit insurance policy—the creditor?

Courts that have addressed this question have uniformly determined that when there is a triggering event—i.e., death, disability, involuntary unemployment or collateral destruction—post filing, the proceeds resulting therefrom belong to the beneficiary creditor, not the debtor or debtor’s estate. The only exception to this rule seems to be in connection with a recovery that “overpays” the amount due the creditor under the debtor’s confirmed plan. In that rare event, the excess amount of any payment remitted by the insurance company that would over-compensate a creditor under a confirmed plan would become an asset of the debtor’s bankruptcy estate.

Creditors should recognize their general right to the proceeds of a credit insurance policy upon a triggering event—even when the debtor is in bankruptcy.

Of course, the most egregious of problems in connection with consumer finance and bankruptcy is a CSR’s violation of the automatic stay! This common mistake is one that I will talk about in the future.