THE only way to keep your assets when you file for bankruptcy is to exempt the asset under applicable state or federal law. Many debtors work for the Federal government and may have a right to receive an annuity payment as part of a Federal Employers Liability Act claim settlement. Are the annuity payments or the right to receive these annuity payments exempt assets when debtor files for bankruptcy? Can debtor keep these payments if he files for bankruptcy?
The applicable provision of law exempting FELA annuity payments is Section 522(d)(10) of the new bankruptcy code. That section says that “The debtor’s right to receive…a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless…”
In Re Jones, in May 1986, the debtor husband was severely injured while working for the Kansas City Southern Railway. He filed a claim under the Federal Employers Liability Act. The railroad and the debtor settled the claim. As part of the settlement, the debtor received a lump sum cash payment, monthly payments of $700 for life, and periodic lump sum payments over 35 years. The final payment was for $200,000. In 1998, the debtor sold the rights to all but the last lump sum payment for $55,000. In 2001, the debtor and his wife filed for Chapter 7 relief. Although the debtor informed his bankruptcy counsel about the last lump sum payment, which came due in 2023, it was not disclosed in his schedules. In 2009, the debtor attempted to sell the final payment. The buyer notified the trustee. The case was reopened to allow the trustee to administer the asset. The debtors amended their schedules and claimed the FELA settlement as exempt under Section 522(d)(a)(C). That section provides that “a debtor’s right to receive a disability, illness, or unemployment benefit” is an exempt asset of debtor in bankruptcy.
The trustee naturally objected to the claim of exemption. That’s what trustees do. The bankruptcy court overruled the trustee’s objection. “An exemption under Section 522(d)(a) requires the benefit be received as payment in lieu of future earnings of a debtor whose ability to generate future earnings has been reduced or lost because of disability, illness, or unemployment. Workers’ compensation and Social Security disability are typical disability payments exempted under thus subsection,” the court said. “
Under these facts and under the plain language of Section 522(d)(a), this particular FELA settlement is exempt under both subsection (d)(a)(C) and (E). The settlement agreement is a contract with debtor’s former employer, which is not only similar to a disability pension, but, in fact, supplants debtor’s disability pension and RRA benefits. Thus, the annuity payment at issue is debtor’s right to receive a payment under a contract on account of disability and is also debtor’s sole disability benefit in place of otherwise exempt RRA benefits. “While the court allowed the debtors to keep the exemption, they were ordered to pay $5,000 to the trustee to reimburse him for the expenses he would not have otherwise incurred but for the debtor’s failure to fulfill his obligations under Section 521. That section requires bankruptcy debtors to file accurate schedules of assets and liabilities and statement of financial affairs.
If debtor had disclosed the FELA annuity and details of the transaction in his schedule of assets and statement of financial affairs at the time that he filed his Chapter 7 case, the trustee would have had enough time, that is 30 days after the 341-a hearing, to determine whether or not he was going to object to the claim of exemption of the FELA annuity. He would have determined with proper research at that time that it was exempt. But since he knew nothing about the annuity and only found out about it when the buyer contacted him years after the case was closed, he incurred $5,000 to pursue his objection.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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