The interaction between bankruptcy and personal injury lawsuits is all about timing. The pivotal date is not when you settle the accident case; it’s when the accident -- called a cause of action -- occurs. If it happens before you file for bankruptcy, any money you might ultimately receive from the event is part of your bankruptcy estate. If it’s part of your bankruptcy estate, most of it is available to your creditors in Chapter 7.
You must list your pending personal injury lawsuit in your bankruptcy petition, according to AllLaw. If you’re injured while you’re in bankruptcy, and in some cases up to 180 days after filing for bankruptcy, you must notify the trustee. Otherwise, the court can take the position that you’re committing fraud if it appears that you’re trying to cheat your creditors out of their share of the money. Bankruptcy fraud is a crime.
The bankruptcy trustee takes control of your accident lawsuit if you’ve filed for Chapter 7. You have no voice in the case any longer, according to the law firm of Scott & Fenderson. The potential settlement or jury award proceeds belong to your bankruptcy estate, not you. The trustee has control over your estate, including all your other property and assets -- the lawsuit is just one more asset. He’ll decide whether to settle your case or go to trial. How much he settles for is entirely up to him. He has a legal obligation to act in the best interests of your creditors. If you have $100,000 in debt and the defendant’s attorney offers a $100,000 settlement, the trustee will most likely take it. He won’t hold out for more money so you might receive some compensation for your pain and suffering or other damages. He just wants to make sure as much of your debt is paid as is possible.
Scott & Fenderson warns that if you’re still receiving medical care for your injuries, your Chapter 7 trustee has control over your treatment, too -- or at least over payments made to medical care providers. Because he’s managing your case with an eye toward how much he can get for your creditors, he decides what medical bills to pay from the settlement proceeds. This may just be enough to establish the extent of your injuries for purposes of the lawsuit -- a leverage tool to get more money for your creditors. If you need ongoing treatment, these bills are your responsibility. Your settlement won’t compensate you for these costs if the proceeds go to your creditors, not to you, although any bills you incurred before you filed for bankruptcy are typically discharged.
You may not lose all your settlement proceeds. Bankruptcy exemptions are available in all 50 states, and they allow you to keep some of your property. Your personal injury lawsuit counts as property. Federal exemptions are also available. Some states allow you to choose the federal exemptions, while others require that you use the state list.
Federal law exempts up to $22,975 in personal injury settlements or awards, and some states exempt dollar amounts of personal injury proceeds as well. The federal list also includes a wildcard exemption that you can tack onto the personal injury exemption to cover more of the proceeds. If you’re able to exempt $30,000 of your $100,000 settlement, the trustee must turn that $30,000 over to you. Your creditors only receive $70,000, even if this doesn’t cover all your debts.
Chapter 13 treats accident lawsuits and settlements differently. This is the form of bankruptcy in which you fund a payment plan to satisfy your debts over three to five years. The trustee doesn’t claim or sell your property to give to your creditors; you’re paying them from your disposable income. You retain control over your own lawsuit if you file for Chapter 13, and you can keep the proceeds. You’ll probably have to increase your plan payments, however, to reflect this extra money that’s now available to you.
- Scott & Fenderson: The Effect of Bankruptcy on a Personal Injury Case
- Harborstone Law Group: Ouch! Protecting the Debtor’s Personal Injury Claim in Bankruptcy
- Nolo: I Received a Large Settlement in a Personal Injury Case. Will I Lose It in Chapter 7 Bankruptcy?
- Nolo: Can the Bankruptcy Trustee Take Money I Win in a Personal Injury Lawsuit?
- AllLaw: What Happens to a Settlement I Receive After Bankruptcy?
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.