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cfortunato
cfortunato, Attorney
Category: Bankruptcy Law
Satisfied Customers: 8023
Experience:  Bankruptcy professor.
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An individual has taken substantial loans against a whole life

Customer Question

An individual has taken substantial loans against a whole life insurance policy. Individual files for bankruptcy in 2010. Was the loan discharged in bankruptcy.

The life insurance company defaulted the loan in 2012 and issued a Form 1099-R for a deemed distribution. Is the individual liable for taxes on this deemed distribution?
Submitted: 3 years ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 3 years ago.

cfortunato :

Hi - my name is Chris, and I am a Bankruptcy and Consumer Protection attorney here to assist you.

cfortunato :

To avoid having to include the life insurance loan as income for tax purposes, the individual would have to have paid back the loan.

cfortunato :

This is not the type of loan that gets discharged in a Bankruptcy, as there is no creditor involved.

cfortunato :

The reason is when someone "borrows" money against their life insurance policy, they are actually taking their own money - money that already belongs to them.

cfortunato :

So this type of loan is not a debt, and since only debts can

cfortunato :

be discharged, this type of loan cannot be discharged.

Customer :

So the bankruptcy has no effect on the loan being treated as a deeme ddistribution post-bankruptcy?

Customer :

Deemed distribution

cfortunato :

Yes - that is correct.

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