Can my annuity be seized by creditors?
When you owe money to either creditors or those who have won a civil judgement, the law protects many of your necessary assets from being seized. Retirement accounts have generally fallen in the category of protected assets in bankruptcy or civil court, however annuities don’t always enjoy the same protection.
Whether some or all of your annuity can be used to pay back creditors in a bankruptcy proceeding depends largely on the state you file in and the type of bankruptcy you file.
Chapter 13 bankruptcy enables individuals with regular income to develop a plan to repay all or part of their debts. Debtors propose a repayment plan to make installments to creditors over three to five years, so you do not have any assets seized or liquidated. Once the repayment plan is approved by the court, you make payments to a trustee who then distributes those funds to creditors according to the terms of the plan. You can include your annuity(s) as part of the income available to repay those debts.
Chapter 7 bankruptcy requires a liquidation of any non-exempt assets in order to repay creditors. Retirement assets typically fall in the category of exempt assets, meaning they cannot be liquidated to pay creditors. But annuities fall into a gray area and whether they’re subject to liquidation depends on the state. The federal exemption only applies to annuities payable by reason of illness, disability, death, age or length of service. Additionally, it only exempts the amount “reasonably necessary” to support you and your dependents. In addition, 403(b) annuities, available to educational institutions and non-profit organizations, are exempt from creditors. Several states have broader protections for annuities.
How states treat annuities in bankruptcy
States in which annuities are completely sheltered from creditors include Florida, Michigan, Minnesota, New Mexico, Oklahoma, Texas and Wisconsin. California law shields an annuity provided it has not yet matured at the time of bankruptcy. The states of Iowa, Louisiana, North Carolina, Rhode Island and Wisconsin will protect annuities provided the owner didn’t buy one for the express purpose of keeping assets away from creditors.
A handful of states will allow the bankruptcy filer to keep enough of the annuity to provide adequate income. It is up to the court in these situation to determine what that amount is and the person filing will have to convince the judge of how much he or she needs. These states are Georgia, Missouri, Mississippi, New York and Utah.
Other states provide a specific maximum exemption amount, which varies by state. Any value in excess of the maximum amount is fair game to creditors. This applies in the states of Alabama, Arkansas, Delaware, Idaho, Kentucky, Maine, Nevada, New Jersey, Pennsylvania, South Dakota, Vermont, Washington and Wyoming, and the District of Columbia.
Annuities in the name of a debtor’s spouse, children, parent or other dependent is exempt from creditor collection in Hawaii, Illinois, Maryland, Ohio, Pennsylvania and Tennessee. North Dakota’s exemption in these cases in based on a set amount.
Lastly, the states of Colorado, Massachusetts, Montana, New Hampshire, Virginia and West Virginia offer no protection to annuities.
If you file in a state that will not shield your annuity assets in a Chapter 7 filing, you may want to consider a Chapter 13 filing so that you can hold onto those assets.
There are at least two other situations in which your annuities won’t be protected from creditors or civil judgement, regardless of your state.
The first is when the creditor is the IRS. If you owe back taxes, there is no such thing as exempt property. The government can seize any of your assets to fulfill your tax obligations, including an annuity.
The second is if you used an annuity to secure a loan. Any financial assets that have been used as a collateral for a loan are no longer exempt from creditors or judgements. Therefore, it is advised that you not use your annuity in that way.