Arizona residents who file for Chapter 7 bankruptcy do not necessarily have to surrender annuities or life insurance policies, according to a federal appeals court ruling dating back to 2012. The decision has relatively limited impact nationally because the court relied upon the provisions of Arizona law pertaining to exempt property.

A person who seeks debt relief by filing for Chapter 7 bankruptcy must surrender all assets of value to the bankruptcy trustee but may retain assets that are exempt under state law. For example, an Arizona resident may retain ownership of numerous assets, including a car worth no more than $6,000, a bicycle, one gun, and wedding and engagement rings valued at under $1,000, among other things.

The assets at issue in the federal appeals court case were life insurance policies having a cash value of $40,000 and an annuity valued at $33,000. The trustees argued that the bankruptcy law made the assets subject to liquidation because the beneficiaries of the insurance policies and the annuities were adult children who were not dependents of the debtor. The appellate court judges agreed with the trustees about the bankruptcy law, but they ruled that Arizona law does not limit the exemption to dependent children.

Chapter 7 bankruptcy offers a person who is struggling with debt the opportunity for a fresh financial start. As this story illustrates, a person does not have to surrender everything they own to escape the burden of overwhelming debt. A bankruptcy attorney can review debt relief options that are available to a person and explain the benefits, limitations and eligibility requirements of each. 

Source: Arizona Daily Star, “Annuities, life policies get shield in bankruptcies,” Howard Fischer, Aug. 25, 2012