Structured Settlements and Bankruptcy: What You Need to Know

Bankruptcy and Your Structured Settlement: What You Need to Know

Sometimes, money troubles can get so overwhelming that filing for bankruptcy feels like the only way out. If you’re getting structured settlement payments, you might be wondering, “What happens to my payments? Will creditors take them? Am I protected?” Let’s break this down step by step to make it simple and clear.

What Is a Structured Settlement?

Before we dive into how bankruptcy affects structured settlements, let’s start with the basics.

A structured settlement is a plan where you get payments over time instead of one big lump sum, usually from a lawsuit or insurance claim. These payments are often used to help with things like medical bills, everyday expenses, or education costs.

For example, if you won a personal injury case, instead of getting $100,000 all at once, you might receive smaller payments over several years. One big plus? These payments are usually tax-free!

But how does this work if you’re going through bankruptcy? Let’s take a closer look.

What Happens in Bankruptcy?

Bankruptcy is a legal process that helps people or businesses handle their debt when they can’t keep up with payments. There are two main types for individuals:

Chapter 7 Bankruptcy: Known as liquidation bankruptcy, it involves selling off non-essential assets to pay creditors. Any remaining debts are often erased.
Chapter 13 Bankruptcy: Called reorganization bankruptcy, this lets you keep your stuff while creating a plan to repay debts over time (usually 3–5 years).

When you file for bankruptcy, the court will check your income, assets, and debts. If you’re getting structured settlement payments, these will also be reviewed.

Are Structured Settlements Considered Assets?

Yes, structured settlements are considered part of your assets. But whether creditors can take them depends on a few things:

The Type of Bankruptcy: In Chapter 7, more of your assets might be at risk compared to Chapter 13, where you focus on repayment.
State Laws: Some states protect structured settlements, especially if they’re tied to personal injury or other specific cases.
Purpose of Payments: If the payments are for essential needs, like medical expenses or basic living costs, they’re more likely to be protected.

How Do Courts Handle Structured Settlements?

When deciding what happens to your structured settlement, the court looks at how you’re using the money:

Essential Expenses: If your payments go toward rent, food, or medical care, they’re more likely to be protected.
Extra Income: If your payments are more than you need for basic living, part of that money might go to creditors.

The court’s job is to find a fair balance between helping you get back on track and making sure creditors are treated fairly.

Are There Protections for Your Payments?

Yes, there are rules that can help protect your structured settlement during bankruptcy. Here are a few:

Federal Exemptions: Payments from personal injury cases are often protected up to a certain amount.
State-Specific Protections: Some states have extra rules that completely protect certain types of settlements, like those for wrongful death or workers’ compensation.
Wildcard Exemptions: These let you protect any asset, including structured settlements, up to a certain dollar limit.

It’s important to know what exemptions apply in your state. A bankruptcy attorney can guide you.

Can Creditors Take Your Payments?

In most cases, creditors can’t directly take your structured settlement payments unless the court gives permission. Here’s why:

Legal Protections: Many structured settlements, especially for personal injury cases, are protected by law.
Annuities: Structured settlements are often funded through annuities, which are harder for creditors to access.

That said, if your payments are more than you need to live on, part of the money might still go toward paying debts.

What If You Want to Sell Your Structured Settlement?

If you’re thinking about selling your structured settlement payments to manage debt, here’s what you should know:

Court Approval Is Needed: You’ll need the court’s okay to sell your payments, especially during bankruptcy.
It Affects Your Bankruptcy Case: Selling your payments could change how the court views your financial situation.
Choose Carefully: If you sell, make sure to work with a trusted company to get a fair deal.

Selling your structured settlement should only be a last resort—and always with professional advice.

How to Protect Your Structured Settlement

Here are some steps to keep your structured settlement safe during bankruptcy:

Know the Purpose: Keep records showing that your payments are for essential needs, like medical bills or living expenses.
Research State Laws: Learn about exemptions in your state that might protect your payments.
Stay Organized: Keep detailed records of how you use your payments.
Get Legal Help: Bankruptcy laws can be tricky, so it’s best to have an experienced attorney by your side.

Real-Life Examples

Let’s look at two examples to see how this might work:

Protected Payments: Maria uses her structured settlement to pay for her son’s medical treatments. When she files for Chapter 7 bankruptcy, the court protects her payments because they’re essential for her family.
Partial Use: Sam receives payments from a business lawsuit. Since his payments are more than he needs for daily living, the court uses part of them to pay creditors but lets him keep enough for his necessities.

These examples show how your situation affects the outcome.

Key Takeaways

Bankruptcy can be tough, but it doesn’t mean losing everything. Here’s what to remember:

Structured settlements are considered assets, but many have legal protections.
Courts look at how you use your payments when deciding what happens.
Selling your payments during bankruptcy should only be done carefully and with expert help.

By understanding your rights and getting the right advice, you can protect your financial future. If you’re unsure about your situation, talk to a bankruptcy attorney or financial expert to make the best decisions for your needs.