Bankruptcy

Mortgage Insurance Benefits And Chapter 7 Means Test

By Jonathan Alper

A reader emailed me a question about how mortgage protection insurance is treated in the means test. The reader had a mortgage insurance policy that paid his monthly mortgage payments in the even he lost his job. The insurance covered payments for a number of months after which payments stopped. This reader found himself out of work and wanted to file Chapter 7 bankruptcy. He wanted to know if the money the mortgage insurance company paid to his mortgage lender would count as income for means test purposes.

I have never encountered this issue in any of my cases. My understanding is that insurance proceeds are ?income? if the insurance is designed to replace or supplement lost income. Unemployment insurance, for example, is income for means test purposes. The mortgage insurance policy appears to have been designed to replace the debtor?s income temporarily in event of a job loss. For that reason, I think the insurance payments should be treated as income for Chapter 7 qualification.

The income is temporary income. If the mortgage insurance payments will cease within a reasonable time after the debtor files Chapter 7 I think the debtor would be permitted to file Chapter 7 regardless of means test result because it would be obvious that he will have no income at a time certain. The means test includes a ?special circumstances? provision to account for debtor?s who face financial hardship which is not considered in the means test formula.

Full post as published by Florida Bankruptcy Law on November 16, 2010 (boomark / email).