The good news is that most states exempt structured settlements from bankruptcy proceedings. So, even though your other assets – if you have any – might be at risk, your settlement will be intact. This is not the case if you sell all or part of your settlement for a lump sum of cash.
What happens if a settled defendant files bankruptcy?
Outside of bankruptcy, however, settlement agreements provide that kind of certainty only if bankruptcy does not follow. If a settling defendant later files bankruptcy, even if it has made the full settlement payment, the consequences can be far reaching.
Is there such a thing as a bankruptcy proof settlement agreement?
While there is no such thing as a bankruptcy proof settlement agreement, these risks can be reduced and managed to a considerable extent by awareness of the bankruptcy factor and appropriate structuring of the settlement.
What is a structured settlement in a personal injury case?
A structured settlement is an arrangement that provides the plaintiff with regular payments over the course of several years or for the rest of the plaintiff's life. They are especially helpful when the plaintiff suffers a serious and permanent injury known as a catastrophic injury.
What are the risks of bankruptcy to settlements?
The risks that the potential of future bankruptcy poses to settlements are multi-faceted. The collectability of agreed payments over time is at risk.
Are structured settlements protected from creditors?
In addition, if an injury victim gets into debt and has creditors making claims, their assets could be exposed to these claims. judgment creditor claims against structured settlement annuities. In addition, structured settlements offer enhanced protection in case of divorce or bankruptcy.
What is a disadvantage of a structured settlement?
A major drawback of a structured settlement is that it may jeopardize the beneficiary's eligibility for public benefits, which may be particularly problematic when the person's medical needs are covered by Medicaid rather than private health insurance.
Are structured settlements safe?
MYTH #2: Structured settlement returns are dependent on market conditions. Structured settlements are one of the safest, most stable investments on the market. The rate of return is locked in when the annuity is purchased, providing the claimant with a reliable investment, regardless of how the market fares.
Is a structured settlement considered an asset?
Families may be entitled to receive a stream of tax-free payments to replace income after a loved one's death. Structured settlements — or structured annuities — are both financial products and legal judgments. While they function somewhat like private assets, they are also subject to complex regulations.
Are structured settlements a good idea?
The best reason to support structured settlements is to have payouts of income to last throughout the beneficiary's lifetime. With guaranteed payments, there is less chance of losing principal to poor investments, spendthrift habits or the undue influence of family and friends.
What is better a lump sum or structured settlement?
Structured settlements can save you on taxes versus a lump sum, and for many people work as a form of income or annuity every year. Structured settlements can work in many instances. But they may be less than advantageous in others.
How do you get out of a structured settlement?
To cash out your settlement annuity, you sell your right to receive certain payments that are due under your settlement agreement. The companies that buy the rights to these payments, and give you cash, are called "factoring companies."
How long does a structured settlement last?
If you receive a structured settlement instead of the $300,000 cash, you'll get payments over a term of years or your lifetime (however you choose), and each payment is fully tax free. Thus, a structure converts your after-tax earnings into a tax free return.
Is a structured settlement considered income?
Structured settlement payments do not count as income for tax purposes, even when the structured settlement earns interest over time.
Do you have to pay taxes on structured settlement?
Under a structured settlement, all future payments are completely free from: Federal and state income taxes; Taxes on interest, dividends and capital gains; and. The Alternative Minimum Tax (AMT).
What percentage do structured settlement companies take?
9% to 18%How Do Structured Settlement Purchasing Companies Make Money? Factoring companies generally take anywhere from 9% to 18% to cover their operating costs and turn a profit.
Who owns a structured settlement agreement?
A settlement agreement establishing the structured settlement will typically expressly state that the assignment company has all rights of ownership of the annuity. The structured settlement payee only owns the right to receive payments. The payee does not own the structured settlement annuity.
How much do structured settlement companies take?
9% to 18%How Do Structured Settlement Purchasing Companies Make Money? Factoring companies generally take anywhere from 9% to 18% to cover their operating costs and turn a profit.
Are structured settlements taxable?
Structured settlement annuities are not taxable — they're completely tax-exempt. It's a common question that we are asked by personal injury attorneys, and in certain situations, the tax-exempt nature of structured settlement annuities results in significant tax savings to the client.
What types of cases are more likely to result in structured settlements?
Examples of cases that may result in structured settlements include personal injury, workers' compensation, medical malpractice and wrongful death.
How do you value a structured settlement?
You can find the present value of your structured settlement by using a formula or a present value table. The present value is the cash value of all future payments due to you minus a percentage set by the buyer.
What is a settlement agreement in bankruptcy?
Settlement agreements are intended to bring disputes to a conclusion and to allow the parties to substitute certainty for controversy. In the bankruptcy context, when the debtor or trustee agrees to a settlement, that is exactly what the parties get once the settlement is submitted to and approved by the bankruptcy court under Rules 2002 (a) ...
What is the risk of a bankruptcy settlement?
Perhaps the most critical risk in settlements is the risk that the settling plaintiff will end up with neither the settlement payment it bargained for nor the ability to assert the full amount of its original claim in the defendant's bankruptcy. Without some attention to this risk, this is the likely result of most simple settlement agreements involving payment of a compromised amount. The plaintiff accepts the agreed payment from the defendant and in turn immediately gives the defendant a full release of all claims and dismisses its lawsuit with prejudice. If the settlement payment is later recovered as a preference, the plaintiff may be hard pressed to revive its original claim. The plaintiff then may be left with only an unsecured claim for the amount of the preference (i.e.,the settlement amount), to be paid cents on the dollar, rather than having the ability to receive pro rata payment for the full amount of the original claim. The plaintiff should address this risk in negotiating the terms of settlement and do whatever it can to preserve its right to assert the full amount of its claim.
What happens if a plaintiff accepts a settlement?
The plaintiff accepts the agreed payment from the defendant and in turn immediately gives the defendant a full release of all claims and dismisses its lawsuit with prejudice. If the settlement payment is later recovered as a preference, the plaintiff may be hard pressed to revive its original claim.
What is a preference in a settlement?
A settlement involving payment inherently involves the risk that the payment received by the plaintiff will be voidable as a preference if the defendant files bankruptcy within 90 days after the payment. 11 U.S.C. @ 547 (b). While an argument can be made that the dismissal of litigated claims is "new value"and thereby excepted from preference risk under @ 547 (c) (1), this reasoning is suspect at best and a settling plaintiff must recognize the preference risk just as any creditor receiving payment on a pre-existing debt must. While the release of claims is certainly of value to a defendant, the defendant's settlement payment is a payment on account of the plaintiff's claims, which arose out of some past transaction or event--therefore, a classic preference. See In re VasuFabrics Inc., 39 B.R. 513 (Bankr. S.D.N.Y 1984) (settlement payment is for antecedent debt even if made before signing settlement agreement). While preference exposure cannot be eliminated, the settling plaintiff can take steps to both minimize the risk of preference exposure and reduce its ultimate impact.
How to address nondischargeability in a settlement agreement?
The most straightforward way to address this risk is for the settlement agreement to explicitly state the grounds for the debt being paid, so that the debtor will be hard pressed to dispute those grounds. Rather than reciting that the debt is nondischargeable, the actual grounds for nondischargeability should be stated, consistent with the language of the applicable statutory exception to discharge. This kind of confessed nondischargeability generally will be honored. But see In re Huang, 275 F.3d 1173 (9th Cir. 2001) (agreement of nondischargeability alone not enforceable).
How to minimize risk of default in structured settlements?
The key consideration in minimizing the risk of payment defaults in structured settlements is to consider the negotiation of payment terms a credit decision. If the defendant is not financially solid, the settling plaintiff should not just accept an unsecured obligation to pay, but rather should take the best payment protection possible to prevent the loss of its settlement expectancy in the defendant's bankruptcy.
What is structured settlement?
"Structured" settlements, involving more than just a single payment, often allow the parties to reach a resolution that otherwise would not be possible . The simplest of structures is payment over time, where the defendant agrees to pay the negotiated settlement amount in installments. The defendants likely to negotiate hardest for extended payment terms, however, also are those whose financial condition puts them at the greatest risk of bankruptcy. Obviously, if the settling defendant files bankruptcy before completing its payments, the other party may not realize the full economic value of the settlement. Taking security interests in collateral of sufficient value to cover deferred payments is the settling plaintiff's best option. Although the security interest itself may be subject to challenge as a preference, as discussed later, once the preference period passes the collateral will provide protection for the creditor's future payments even in the event of bankruptcy.
What is structured settlement annuity?
Oftentimes the protection that structured settlement annuities are afforded under the law in terms of judgments and creditor claims is overlooked when analyzing whether to implement one. However, this feature is very important for injury victims who need to protect their recovery. Injury victims only get one opportunity to recover for their injuries. If someone who recovers for their injuries is subsequently involved in an accident where they injure someone else or someone is injured on their property, bank accounts and most investments are exposed to claims. In addition, if an injury victim gets into debt and has creditors making claims, their assets could be exposed to these claims.
Why are structured settlement annuities important?
The enhanced protection from judgments (including divorce), creditors and bankruptcy enjoyed by structured settlement annuities makes them an important planning tool for injury victims to safeguard their settlement proceeds. Before deciding to not structure a settlement, careful consideration should be given to these protections and the value they provide to safeguard an injury victim’s recovery. An experienced settlement planner can help provide advice on all of these issues and provide information about the benefits of a properly created structured settlement plan.
What is settlement payment?
Settlement payments are usually lump-sum (all at once) or structured (regular payments over a period of time). A structured settlement is an arrangement that provides the plaintiff with regular payments over the course of several years or for the rest of the plaintiff's life. They are especially helpful when the plaintiff suffers a serious ...
Why do civil cases never go to trial?
Many civil cases, particularly accident and personal injury lawsuits, never make it to trial because the parties reach a settlement agreement earlier in the litigation process. Generally, a settlement requires the plaintiff (person brining the lawsuit) to discontinue any further legal action in exchange for receiving a money payment from ...
Is a lump sum settlement taxed?
Certain parts of a settlement, whether a lump sum payment or a structured settlement, can be taxed, including punitive damages, some attorney's fees, purely emotional damages not stemming from physical injury, and more.
Do annuities go bankrupt?
Although federal law doesn't allow an insurer to formally declare " bankruptcy ," most states have a safety net for insurance companies that become insolvent: insurance companies and policy claims will continue to be covered and paid by the home state's guaranty association, subject to state limits.
Is a settlement a better option than trial?
In many circumstances, a settlement may be a faster, cheaper, and less stressful alternative to trial . Contact an experienced personal injury attorney to discuss the facts of your case and help you decide whether a structured settlement would be in your best interest.
Do insurance companies have to disclose settlements?
In the past, some insurance companies were reluctant to disclose how much they would have to pay to buy an an nuity covering the amount of the settlement. A structured settlement frequently costs insurance companies less than it would to make a lump-sum settlement. Without this information, the plaintiff's attorney was not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. Today, however, most states, such as New York and Florida, have some form of a disclosure law known as a " Structured Settlement Protection Act " (SSPA). These laws require insurers to be upfront about their costs.
Is a structured settlement taxable?
A structured settlement may provide a plaintiff with a substantial tax benefit because personal injury settlements are considered "tax-free" under the U.S. Tax Code. However, some exceptions apply and can make portions of a settlement taxable, such as an award of punitive damages or interest that accrues on the settlement.
What happens if you settle before bankruptcy?
When parties settle before a bankruptcy filing, the primary risk with respect to settlement agreements is that the party required to make one or more payments under the agreement in exchange for a release will obtain a discharge of its payment obligation. The recipient of the payments (i.e., the releasing party) may then be in a situation in which it will not receive the full amount of the settlement and also cannot assert its original claim against the bankruptcy estate. This risk arises most frequently when the settlement is a structured settlement providing for payments over time.
Can you pay a bankruptcy settlement all at once?
When the entire settlement amount is paid at once, the releasing party receives the entire amount agreed to under the settlement agreement. If, however, the payment is made less than 90 days before the paying party files for bankruptcy relief, the releasing party may be required to turn over the settlement payment to the estate since the amount received (the entirety of the settlement amount) is almost certainly greater than the amount that the releasing party would have received on account of its claim in a Chapter 7 distribution. Similarly, if the releasing party takes a security interest in the prospective debtor’s property to secure a structured settlement, the security interest will likely be subject to avoidance as a preference if the other party files for bankruptcy less than 90 days after the perfection of the security interest.As a practical matter, one way to mitigate this risk is to arrange for the payment (and/or the attachment and perfection of the security interest) to be made as soon as possible in order to lessen the likelihood that the paying party will need to file for bankruptcy within 90 days. Of course, if the settlement payment itself precipitates the filing, requiring an earlier payment may not help. If the payment of the settlement is likely to result in insolvency, the releasing party may choose to defer payment by 90 days while taking a security interest in noncash assets.
Post-Jevic, Expansive Interpretation by Bankruptcy Courts Possible
By Andrew C. Kassner and Joseph N. Argentina, Jr. (Drinker Biddle & Reath LLP)
Jevic: Law Firm Perspectives
On March 22, the Supreme Court decided Czyzewski v. Jevic Holding Corp., holding that bankruptcy courts may not approve structured dismissals that provide for distributions that deviate from ordinary priority rules without the affected creditors’ consent.
Jevic: SCOTUS Holds That Priority Rules Apply in Structured Dismissals
By Jonathan C. Lipson (Temple University-Beasley School of Law) and Melissa B. Jacoby (University of North Carolina – Chapel Hill School of Law)
How Absolute is the Absolute Priority Rule in Bankruptcy? The Case for Structured Dismissals
A structured dismissal in a chapter 11 bankruptcy case is a court-approved settlement of certain claims by or against the debtor followed by the dismissal of the case.
Brief for Amici Curiae Law Professors in Support of Petitioners, In re Jevic
By Jonathan C. Lipson (Temple University Beasley School of Law) and Melissa B. Jacoby (University of North Carolina – Chapel Hill School of Law)
What can you protect in bankruptcy?
When you file a bankruptcy case, you can protect particular types of assets with property exemptions. Every state has a list of exemptions for its residents. The federal bankruptcy code has a list of federal exemptions, as well.
What is the exemption for retirement accounts in bankruptcy?
In addition to the exemption for retirement accounts, the bankruptcy code includes an exemption for an annuity that pays "on account of illness, disability, death, age, or length of service.". (Bankruptcy Code § 522 (d) (10) (E).)
How long before bankruptcy can you buy an annuity?
The timing of the creation of the annuity can affect the exemption validity. Some states will only protect annuities purchased more than six months before the bankruptcy case filing. Even without this restriction, the Chapter 7 trustee appointed to administer your case will pay particular attention to the timing of your annuity. Converting a nonexempt asset (like cash in a deposit account) to an exempt asset (like an annuity) is not strictly prohibited by the bankruptcy code. However, when it happens shortly before filing, the court can disallow the exemption if it concludes that the debtor purchased the annuity solely to protect the funds from the reach of the bankruptcy court.
What are the exemptions for annuities?
State annuity exemptions vary widely. An annuity that qualifies in one state can fail to be eligible in another based on just one term, such as whether the annuity has a triggering event or whether the periodic payments exceed a given amount. A few states provide exemptions for virtually all annuities. On the other end of the spectrum, a few states don't provide any protection.
Is annuity a valuable asset?
Annuities are valuable assets, and, as with any other valuable property, it's prudent to talk to local bankruptcy counsel before proceeding with a bankruptcy case.
Can a bankruptcy be used in a state?
The federal bankruptcy code has a list of federal exemptions, as well. In most states, the bankruptcy debtor (filer) can only use the state's exemptions, but some states allow the debtor to choose whether to apply the state or the federal exemption scheme (but mixing between the two sets isn't allowed).
Can annuities be exempt from bankruptcy?
Many annuities are exempt (protected) from the reach of creditors under either federal bankruptcy law or state law, but some are not. The ability to use the exemption can turn on the particular characteristics of the annuity, making this area of law complicated. If you have an annuity and you're thinking about filing a bankruptcy case, ...
