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Are Structured Settlements Protected in Bankruptcy?
Structured settlements provide guaranteed periodic payments to individuals who have received legal settlements, often from personal injury cases or other legal claims. When facing bankruptcy, understanding how these settlements are treated is crucial for both debtors and their advisors. If you find yourself in this situation, you’ll need to know about the protections available for structured settlements in bankruptcy proceedings and the key factors that determine their treatment.
Understanding structured settlements
A structured settlement is a financial arrangement that provides periodic payments to a plaintiff as compensation for personal injury, wrongful death, or other claims. Instead of receiving a lump sum payment, the recipient gets regular payments over time, often through an annuity purchased by the defendant’s insurance company.
Basic bankruptcy protection principles
Most structured settlements enjoy significant protection in bankruptcy proceedings due to several layers of legal safeguards:
- Federal law protection: The Bankruptcy Code provides specific protections for structured settlements, particularly those arising from personal injury cases. Under 11 U.S.C. § 522(d)(11)(E), payments for personal bodily injury are exempt from bankruptcy proceedings, subject to certain limitations.
- State law protection: Many states have enacted specific statutes protecting structured settlements from creditors, including in bankruptcy proceedings. These protections often extend beyond federal exemptions and may provide more comprehensive coverage.
Types of protection by bankruptcy chapter
The different chapters of bankruptcy come with their own unique rules when it comes to structured settlements:
Chapter 7 bankruptcy
In Chapter 7 bankruptcy, structured settlement payments generally receive strong protection:
- Personal injury settlements are typically fully exempt.
- The trustee usually cannot access future payments.
- Present value of the settlement remains protected.
- Income from the settlement may be protected if used for support.
Chapter 13 bankruptcy
Chapter 13 bankruptcy treatment differs slightly:
- Payments may need to be included in disposable income calculations.
- The court may consider settlement income when determining payment plans.
- Basic living expense payments usually remain protected.
- Future payments generally maintain their exempt status.
Factors affecting protection levels
Several key factors influence the level of protection afforded to structured settlements:
Source of settlement
- Personal injury settlements receive the strongest protection.
- Workers’ compensation settlements are generally well-protected.
- Non-injury settlements may have fewer protections.
State of residence
Protection levels vary significantly by state:
- Some states provide absolute protection.
- Others limit protection to specific types of settlements.
- A few states offer minimal protection beyond federal exemptions.
Timing of payments
The timing of payments can affect their treatment:
- Future payments usually receive stronger protection.
- Accumulated payments may have less protection.
- Regular income stream treatment varies by jurisdiction.
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Special considerations
Some key points to keep in mind:
Anti-assignment provisions
Many structured settlements contain anti-assignment provisions that:
- Prevent voluntary transfer of payment rights.
- Strengthen bankruptcy protection.
- May affect court treatment of the settlement.
Commingling funds
To maintain maximum protection, settlement recipients should:
- Keep settlement funds separate from other assets.
- Maintain clear records of payment sources.
- Avoid mixing protected and non-protected funds.
Best practices for protecting settlements
If you’re facing bankruptcy and have a structured settlement, take these practices into consideration:
Before filing bankruptcy
- Document settlement origins and terms.
- Separate settlement funds from other assets.
- Consult with bankruptcy counsel familiar with structured settlements.
- Review state-specific protections.
During bankruptcy
- Properly claim all available exemptions.
- Maintain detailed records of settlement payments.
- Avoid voluntary transfers or assignments.
- Report all income accurately.
Additional resources
For those seeking more information:
- National Organization of Life and Health Insurance Guaranty Associations (NOLHGA)
- National Structured Settlements Trade Association (NSSTA)
- American Bankruptcy Institute (ABI)
- State-specific bankruptcy exemption guides
Recipients of structured settlements considering bankruptcy should consult with qualified legal professionals who can provide guidance based on their specific circumstances and jurisdiction.
The takeaway
Structured settlements generally enjoy strong protection in bankruptcy proceedings, particularly those arising from personal injury cases. However, the level of protection varies based on multiple factors, including state law, settlement type, and bankruptcy chapter. Recipients should take proactive steps to maintain these protections and seek qualified legal counsel to navigate the complexities of bankruptcy while preserving their settlement rights.
Let Peachtree help
At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their structured settlement payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every annuity is unique, which means every payment sale will be different, they all have the same basic five steps:
- Call one of our representatives.
- Receive a free, no-obligation quote for the sale of your payments.
- Review and sign the purchase agreement.
- Court order process.
- You get your cash!
Why should you choose Peachtree?
It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.
