Retirement Annuities & Bankruptcy Laws

By Heather Frances J.D.

Annuities can provide a source of consistent income throughout your retirement years, but they also can be attractive to creditors as a source to repay your debts. If you file for bankruptcy, you may be able to keep your annuity’s cash value and monthly payments, depending on your state’s laws and the type of bankruptcy you file. Under many circumstances, you can keep all or part of your annuity payments if you declare bankruptcy, particularly if you rely on the them to support yourself and your family.


When you create an annuity, you place a monetary investment into someone else’s control in exchange for regular payments based on the initial investment. Annuities can be either deferred or immediate, depending on when you start collecting payments. Immediate annuities begin paying immediately, so they may be more beneficial to purchase as you approach retirement age. Deferred annuities grow over time without sending you payments, but they can be converted into immediate annuities when you're ready to receive payments. Both types of annuities are either fixed, meaning you receive a set amount, or variable, meaning you receive a payout amount based on market performance. Annuities also can be a combination of fixed and variable.


The role your annuity plays in your bankruptcy case depends, in part, on the type of bankruptcy you file. Chapter 7 bankruptcy requires a liquidation, or sale, of your nonexempt assets, though you typically get to keep your exempt assets. The list of exemptions available in your case depends on the state in which you file, because you're allowed to use your state's list, the federal government's list or both. Under Chapter 13 bankruptcy, you must create a repayment plan that provides for the repayment of some or all of your debts over a three- or five-year period. You must have a regular income to create a repayment plan, so you can include your retirement annuity as part of the income available to repay your debts.

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Chapter 7 Exemptions

Both federal and state laws provide exemptions that may include the cash value of annuities and annuity payments, but your state’s laws determine whether you can use the federal list, state list or both. The federal exemption for annuities, found in 11 U.S.C. 522(d)(10)(E), can be difficult to use because it only exempts 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. Typically, state exemptions are much clearer and more generous. For example, Florida exempts annuities without any limitations while Pennsylvania exempts payments up to $100 per month. States like Missouri and Mississippi, however, have similar exemptions to the federal statute, protecting only the amount “reasonably necessary” for support.

Special Annuity Protections

Some annuities fall into specific statutory categories that make them exempt. For example, 403(b) annuities, available to educational institutions and certain non-profit organizations, are exempted under the Employee Retirement Income Security Act of 1974 and under 11 U.S.C. 541(c)(2). Annuities that are part of employer-sponsored retirement plans also are exempt under ERISA, and many states have even broader protections for retirement annuities under state law. Kansas, for example, provides specific protections for certain types of annuities set up under state law.

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