Whether you are considering bankruptcy or going through it, one of the biggest questions you'll face is how your lifestyle and property will be affected.
There is a good chance you can keep your house and possibly your car in a bankruptcy, and you may also be able to keep the assets that have built up in your permanent life insurance policy.
Permanent life insurance offers the ability to grow "cash value" in your policy. In addition to lifelong insurance protection, part of your premium payments go toward a separate cash account that grows over time. When this money is in the policy, insurers use it offset the increased mortality risk as you age and keep your premiums level, but you can also choose to withdraw some or all of your cash value, or take a loan backed by this money.
Federal law allows a person declaring bankruptcy to "exempt" certain types of property from creditors so that he or she will have some assets with which to make a fresh start. Under federal exemptions you can currently protect up to $8,625 of cash value. Furthermore, if you don't need to use the real estate exemption to protect your home, or don't need to use the full exemption amount, you can apply up to $8,075 to protect any other assets from creditors, such as your life insurance cash value.
However, federal bankruptcy law specifically allows each state to "opt out" of federal exemptions and set their own guidelines pertaining to assets you can protect from creditors in order to make a fresh start after bankruptcy. Many states have chosen to opt out and others allow you to choose between state or federal exmeptions. No state is solely under federal exemptions.
Many states have passed laws closely mirroring the federal rules but with varying limits to how much you can exempt. Nevada allows you to protect a portion of your cash value if your annual are not over $1,000 premiums; Nevada also lets you protect annuity proceeds up to $350 a month. Florida law protects all of the cash surrender value of life insurance policies and all annuity proceeds from action by creditors, without a limit to dollar value. To determine what exemptions you may qualify for, consult an attorney familiar with bankruptcy rules in your state.
Money held in annuities that are part of employer-sponsored retirement plans — including 401(k) plans, defined benefit plans, and some types of 403(b) tax sheltered annuity plans — like all money in such plans, is protected from creditors by the Employee Retirement Income Security Act of 1974 (ERISA), according to the National Association for Variable Annuities. This protection is available in the event of bankruptcy and for judgments under state creditor protection laws and, unlike property exemptions, these protections cannot be superseded by state laws.
Not all retirement plans are ERISA plans, so check the materials provided by your employer to know if yours qualifies. In most cases, if your employer is contributing to your retirement account you will probably be protected under ERISA.
Many states have chosen to supplement ERISA by enacting state laws extending protection to other types of retirement accounts and annuities. A few, such as Florida, protect any annuity owned by a resident of the state from creditors, but the total amount of money you can protect also varies from state to state, so be sure you know exactly what protections your state offers for your annuity assets.
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