Depending on where you live and possibly your financial situation, creditors can’t get at your annuities. Well, before you consider a Chapter 7 or Chapter 13 bankruptcy, you should talk to a professional financial advisor to make sure the type of annuity you have will be safe, based on your personal situation.
Types of Annuities
Annuities are financial products that earn you interest, but also pay you a regular income. Payments might be small (a supplement to your annual income) or enough to pay all your bills. They might come monthly or annually.
People set up annuities to protect the original lump sum that’s used to create the asset and fund the ongoing payments, or to ensure that the owner (often a child) doesn’t spend money he or she is being left. For this reason, many people set the terms of an annuity so they can’t be changed.
Some annuities are stand-alone financial assets, while others are set up within an IRA or 401(k).
Protection from Creditors
Whether or not an annuity is protected from creditors depends on a variety of factors. These include state and federal laws, the amount of the annuity, the state where the annuity operates and the reason for the annuity (such as an illness or disability).
For example, some states protect all annuities, no matter what type they are, while others don’t protect any annuities. Most states provide some protection, but place some limits on the protection. For example, in one state, you might be able to protect some of the annuity, but not all of it, based on the size of your payments. In another state, you might lose some or all protection based on the terms of the annuity.
In addition, you receive certain federal protections tied to the amount of your annuity. For example, if the annuity meets the IRS criteria for being a qualified retirement account, you might be able to exempt your annuity from creditors during a bankruptcy. You can also earn an exemption if the annuity was the result of an award for wrongful death, physical injury or reduced or loss of future income.
To prevent fraud, some states only exempt annuities created six months before the owner declares bankruptcy. Even if your annuity was created with no attempt at fraud, if it was set up shortly before you declare bankruptcy, it can look suspicious.
It’s Very Complicated
Based on all of the different factors and criteria used by a bankruptcy court judge to determine if your annuity is protected, it’s very important that you meet with an advisor who has expertise in this area. Bankruptcy judges don’t get to make personal decisions about whether or not your annuity qualifies for protection. However, if they don’t have all of the information necessary to rule in your favor, you might risk your annuity.
This is why it’s important to work with a professional who understands annuity creditor protection by state, and who will make sure that you explain to a judge how the annuity was created, why it was, how much it pays, where the money came from and what the law is in your state regarding annuities.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.