When a debtor files for bankruptcy the debtor is permitted to exempt certain assets from the reach of creditors and a bankruptcy trustee. Personal injury awards can be exempted in whole or part. In New York a debtor has the choice of selecting either a federal or state exemption scheme. The debtor must select one or the other. There is no picking and choosing between the specifics of the two (e.g. a debtor cannot elect the homestead exemption of New York law while also applying the wildcard exemption of Federal law). Therefore, an analysis by a qualified bankruptcy attorney needs to be performed to ascertain which scheme best suits the debtor circumstances.
As of the writing of this article (Jan 2018) the federal personal injury exemption is $23,675. That exemption can potentially be enhanced by a supplemental wild card exemption of up to as much as an additional $13,100 for a total exemption of $36,775. The New York personal injury exemption is $8,275.
There are however limitations under the New York State insurance exemption statute when the debtor files bankruptcy. In bankruptcy the debtor will be allowed only a $5,000 exemption if the annuity contract was “initially purchased by the debtor within six months of the debtor’s filing a petition in bankruptcy” and “not purchased by application of proceeds under settlement options of annuity contracts purchased more than six months before the debtor’s filing a petition in bankruptcy or under settlement options of life insurance policies.” If the annuity is purchased more than six months before a bankruptcy and depending upon the “reasonable needs of the judgment debtor and his family, if dependent upon him,” the debtor may be able to claim the entire annuity as exempt.
If all the above criteria are met, the benefits, rights, privileges and options which, under any annuity contract are due or prospectively due the annuitant, will arguably not be subject to execution by creditors or taken by a bankruptcy trustee if the annuitant paid the consideration for the annuity contract.
Plaintiff’s counsel might want to consider the exemption laws in determining whether to utilize structured settlements in the form of an annuity as opposed to a lump sum payment or other form of payment when a personal injury recovery is awarded.
It should be cautioned however that if creditors or a trustee were to establish that a structured settlement was funded by the purchase of an annuity with the intent to hinder, delay or defraud creditors, such intent might taint the exempt status of such annuity. It is significant to note that the Second Circuit has held that a debtor’s transfer before bankruptcy of non-exempt assets does not automatically compel the conclusion that there was an actual intent to hinder, delay, or defraud creditors; rather, intrinsic evidence of an actual intent to hinder, delay or defraud creditors must be established beyond the mere fact of the transfer. The trustee or creditor bears the burden of proof.
Absent a showing of fraud, bankruptcy trustees who have recently challenged structured settlement annuities claiming that it was not exempt have been unsuccessful in seeking denial of the exemption because it was funded from personal injury award.
In fact, in one case a structured settlement was established by an attorney in connection with a personal injury action in which the attorney/debtor had formerly represented the plaintiff. The debtor/attorney agreed to accept the annuity as his portion of the legal fees in the action. The trustee for the attorney contended that the annuity was not exempt because it was not an insurance policy and nothing more than a device employed by the debtor to spread out a legal fee due to him, whether for budgeting or tax planning purposes. The trustee therefore argued that there was no reason why the asset should be put beyond the reach of the debtor’s creditors. The Trustee lost. The court rejected the trustee’s argument that the exemption be disallowed and the proceeds be treated as an account receivable and available for administration by the trustee in the debtor’s case.
This is a very powerful planning tool for both the personal injury client as well as the personal injury attorney. An experienced bankruptcy lawyer can provide guidance to those who to lawfully maximize their exemptions.