Bruce W. Akerly
The Impact of Bankruptcy on Structured Settlement Payment Streams
One of the frequently emphasized benefits of structured settlements involving acquired annuity payment streams is the protection afforded by bankruptcy. The protection flows both to the debtor/annuitant and to any purchaser of the annuitant’s payment stream.
Because they do not own the annuity or have sold and/or assigned payments under an annuity, many debtors will not list, or forget to list, their annuity payment streams in bankruptcy. When a debtor files bankruptcy, the debtor is required to file a schedule of assets and liabilities. When preparing a schedule of assets for a bankruptcy filing, structure settlement payment rights must be properly and completely disclosed. This includes (a) all payments, whether guaranteed or life contingent, (b) near-term payments, and (c) payments that may not be due for many years.
Similarly, if an annuitant has sold all or part of the payment stream under the annuity, it is important that that transaction be disclosed, particularly if it happened with the statutory period for evaluating fraudulent transfers.
In most states, structured settlement payments are listed in Schedule B (personal property) and Schedule C (exempt property). A debtor must identify the payments as exempt to claim them as exempt, otherwise the chapter 7 trustee or creditors may seek to treat them as property of the bankruptcy estate.
If a debtor fails to identify structured settlement payments in his/her bankruptcy schedules, once discovered, the case may be re-opened to allow the trustee to administer the payments, notwithstanding the granting of a discharge in bankruptcy, and payments in the interim period may be required to be returned to the bankruptcy estate (including those payments that may have been acquired and assigned).
How structured settlement payments are valued in a debtor’s schedules is part art and part valuation science. Schedules of assets, like structured settlement payments (whether exempt or not) must place a value on the asset. The value can be present value or future value. There are no hard and fast rules. A low value attributed to a payment stream that covers many years may raise questions. The bottom line is to make sure the debtor is aware of these issues and seek professional advice should the annuitant consider or decide filing for bankruptcy protection.
A structured settlement is a valuable asset to the debtor and is designed to protect the annuitant and, in the case of bankruptcy, it is important that the debtor/annuitant not do anything to jeopardize that protection