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The Disability Pay Exemption Meets Foster
Published: 2002 | Author: William J. Tucker

This paper discusses the narrowing of Indiana law regarding exemptions for life insurance policies and disability insurance payments.

 

Exemptions for property under Indiana law have been consistently narrowed in recent years.  In re Foster dealt with a claim that an exemption provided by an Indiana statute violated Article I, Section 22 of the Indiana Constitution.  The trustee argued that Indiana Code 27-1-12-14 provided an unlimited exemption for life insurance policies, which was of the type previously been invalidated by the case Matter of Zumbrun, 626 N.E.2d 452 (Ind.1996).  The trustee also challenged the debtors’ claimed exemption of their IRAs based on then-current statute, Indiana Code 34-2-28-1(a)(6).  The Foster court relied on Zumbrun to invalidate the statute exempting life insurance policies.  The statute “exempted an unlimited amount of intangible assets from execution to pay legitimate debts” and was therefore unconstitutional.  In re Foster, 168 B.R. at 186.  Therefore, the debtors’ exemption for the life insurance policy was denied, but the court upheld the claimed exemption for the IRAs.

 

On appeal, the Indiana Supreme Court upheld the exemption for the retirement accounts and found the exemption for the life insurance policies to be constitutionally suspect.  Citizens Nat’l Bank of Evansville v. Foster, 668 N.E.2d 1236, 1239 (Ind. 1996).  The unpublished case In re Stinnet, No. 00-70768 (Bankr.S.D. Ind.2002), extended the Foster “reasonable necessities” test to disability insurance payments under Indiana Code 27-8-3-23.  The court in that case held that a debtor could fully exempt the proceeds from a privately purchased disability insurance policy only upon showing that the amount met the “reasonable necessities” test.

 

In conclusion, the Indiana statute that provides an unlimited exemption for this type of pay is constitutionally suspect, and therefore the “reasonable necessities” test described in Foster will be applied to determine the allowable part of the exemptions.



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