Can you lose your car insurance because you filed bankruptcy?
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We wrote last week about the special concerns military members have when it comes to money troubles. Today we address another concern that can affect servicemen and women who bank with, have loans through or purchase insurance through USAA (United Services Automobile Association). Most members of the Armed Forces are familiar with USAA - it's a private financial institution that provides banking, investing and insurance products and services to those currently serving or that have previously served in any branch of the US military. Today we look at concerns with USAA and car insurance as well as other financial products that can be impacted during bankruptcy.
Prior to 1996, USAA's services were only accessible to officers but, today, many soldiers and veterans of all ranks (including retirees) rely on USAA for their banking services, homeowner's insurance, car insurance and renter's insurance. If you're a servicemember or retiree that uses this company for any of your financial services and you're in money trouble and considering bankruptcy, there are some important things you need to know prior to filing so you can take preventative action.
USAA's stringent customer practices
Some public banks like Union Bank and Wells Fargo will freeze your accounts if you file bankruptcy, but most banks won't. USAA is one of those that punishes its customers across the board for filing bankruptcy. If you are insured with USAA, they will cancel your policies including homeowner's, car insurance and renter's insurance. What's worse is that they may also cut off access to your bank accounts and make you fight to get to your much-needed cash. As an FYI, USAA will also cancel your policies if they find out you or your spouse have ever been in jail.
Why insurers may cancel your policy if you file bankruptcy
This is somewhat understandable and here's why – any funds paid out to an unsecured creditor in the 90 days prior to filing bankruptcy can be taken by the Trustee in your case if they are found to be unearned. For instance, if you have a one year insurance policy that you paid for in advance with a lump sum and it's three months into your policy, this means that nine months of the policy are essentially pre-paid.
The Trustee can demand that your insurer send them that nine months of premiums. This will not make your insurer happy and they may cancel your policy. They can't cancel it retroactively, but they can cancel it as of the date you're paid up through once they provide whatever notice they're contractually required to send. If you pay on a monthly policy basis, it's not likely that you'll be canceled by almost any other car insurance company except USAA. However, because filing bankruptcy lowers your credit score and insurance premiums are based on your FICO rating, your premiums will likely go up.
What to do if you bank and are insured through USAA
Prior to filing bankruptcy, it's wise to not only open a new bank account and move your funds, but also to move your direct deposits to your new bank. Also be sure to move any auto-debits for utility payments and other bills that will continue during and after your bankruptcy. Also go ahead and get a new car insurance policy (and homeowner's or renter's) through a new insurer.
Try to get your new policy premium(s) set up on a month to month payment basis, or quarterly at the most. This will reduce your risk of cancellation and not put you in the position of having any pre-payment that the Trustee can demand to have paid to the court. Once the new policies are in place, go ahead and cancel your USAA policies. This will ensure you don't have a lapse in coverage, which can cause you legal problems.
If you're in the Armed Services and are experiencing financial hardship, contact the law offices of John T Orcutt for a free consultation on how bankruptcy can help you get a fresh start without risking your military career. Our attorneys have extensive experience helping military members and have great respect for your service to our country.