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Eighth Circuit BAP Rules Debtor May Not Claim Annuity as Exemption - Bryan v. Stanton

March 26, 2012

Vincent Howard and our Perris personal bankruptcy lawyers were interested to see a recent appeals court ruling on a bankruptcy issue involving an unusual asset: an annuity. An annuity as used here is a form of investment in which the investor pays a sum at the beginning -- usually quite large -- and is paid back with regular payments over time, or takes out a lump sum at a later date. They are sold by life insurance companies, and generally provide tax-free payments, sometimes with interest. In Bryan v. Stanton, bankruptcy debtor Karolyn Joyce Bryan wished to claim an exemption for her interest in an annuity in her Chapter 7 case. Bryan's Schedule C claimed the annuity exemption as a form of life insurance, but trustee Janice Stanton objected, arguing that the statutes in question don't apply. Ultimately, the Bankruptcy Appellate Panel of the Eighth U.S. Circuit Court of Appeals agreed.

Bryan bought the $30,000 annuity in 1993, payable starting in 2033. She filed for Chapter 13 bankruptcy in January of 2010 but converted to Chapter 7. Her claims for an exemption for her interest in the annuity were rejected once while it was a Chapter 13 case and once more in April of 2011. Rather than appealing, she simply submitted a new plan claiming the same exemption for the same reasons, arguing that Missouri law makes the annuity a form of life insurance, which is exempt from seizure. The life insurance argument was rejected, but the court held a hearing on her claims regarding Missouri Rev. Statutes sec. 377.330 and 377.090. Those statutes provide that money and benefits payable by "assessment plan" or "stipulated premium" life insurance companies are exempt from seizure. The court ultimately rejected those claims as well. Bryan appealed.

The BAP found multiple reasons to uphold the bankruptcy court, starting with res judicata. Bryan received a final order on her exemption claim under the Missouri statutes in April of 2011, the BAP said, and the later order involved the same parties and a common nucleus facts. Bryan could and should have appealed the earlier orders instead, the court said. This was the basis for the ruling, but the court went on to offer several alternatives. Under three of the Missouri statutes Bryan cited, the annuity would have to be insurance and the annuity company would have to be authorized to do business as a stipulated premium or assessment plan insurance company; the court found that none of these were true. Finally, it rejected Bryan's assertion that the relevant sections of Missouri law are exemption statutes. Whether this is true is irrelevant, the court said.

The Anaheim individual bankruptcy attorneys at Howard Law, P.C., sympathize with the bankruptcy filer in this case. Some assets are exempt in bankruptcy and others aren't, and the differences can seem arbitrary. Sometimes, Congress or the state legislature has a good reason for exempting an asset, such as encouraging homeownership or retirement savings. However, it's unclear whether treating annuities differently from life insurance was an intentional choice or an oversight. Unfortunately, the consequences are severe for filers like Bryan, who have little choice but to give up rights to an asset designed to care for them as they age. Vincent Howard and our Pico Rivera consumer bankruptcy lawyers work with clients to identify assets that are vulnerable like this and take the strongest steps we can to protect them.

If you're so deep in debt that you don't believe you can ever get out and you'd like to discuss your options with an experienced attorney, call Vincent Howard at Howard Law in Orange County. You can send us an email or call today at 1-800-872-5925.

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