Does Bankruptcy Affect Personal Injury Claims?

What can be more terrible than suffering a personal injury for no fault of your own? It is filing for bankruptcy. When you are contending with your personal injury and are compelled to file bankruptcy, it certainly puts a strain on your financial and personal situation. The sad part is your personal injury proceeds may get determined by the Bankruptcy Court.

What bankruptcy principles impact a personal injury case?

There are four main principles of bankruptcy that may impact a personal injury case – assets, disposable income, automatic stay and discharge of debt.

  • Assets: On filing bankruptcy, the bankruptcy court creates a ‘bankruptcy estate’, which is a separate entity from the person who has filed bankruptcy. The personal injury or workers’ compensation claims become part of the bankruptcy estate.
  • Disposable income: The disposable income of the person who files bankruptcy dictates whether he or she should repay the debt or not.
  • Automatic stay: An automatic stay prevents the creditors from seizing property of the debtor or take any action to seize such property. This allows the bankruptcy trustee to equitably distribute assets in an organized way. The creditors cannot proceed with litigation, service, discovery, trial, enforcement of judgments and perfection of liens against a debtor without the court’s permission, if he or she has filed bankruptcy. There are some exceptions too.
  • Discharge of debt: A successfully completed bankruptcy case gets the debtor a discharge order that certifies he or she no longer owe any debts.

So, if you are affected by personal injury and file for bankruptcy, then your assets and disposable income become the most important principles for analyzing your circumstances. On the other hand, if you have committed a tort leading to personal injury to someone else and you file for bankruptcy, then the principles of automatic stay and discharge of debt needs to be understood.

Should you file bankruptcy if you sustained a personal injury?

Various personal injury attorneys have varying opinions on whether their injury client should file or not file bankruptcy. In case, there is no financial threat to you, it is better to wait for the settlement of the injury claim before filing bankruptcy.

Chapter 7 or Chapter 13 bankruptcy?

If your injury claims arose before you filed Chapter 7 bankruptcy, they are required to be disclosed as an asset. In case they arose after filing Chapter 7, then they are not considered a part of the bankruptcy estate and are not required to be disclosed.

In Chapter 7 bankruptcy case, the trustee acts on behalf of the bankruptcy estate and enjoys total authority to pursue the litigation and negotiate settlements, while you recuperate from your injuries. The trustee’s focus is to minimize payment to your medical providers in order to maximize payment to creditors. However, any settlement requires the bankruptcy judge’s approval and you cannot object to any settlement or have any say in it.

In other words, the creditors get paid in full and you cannot participate in the settlement process or object to the amount of settlement. What’s more, if the medical expenses are incurred after the case of bankruptcy, these are not dischargeable in the bankruptcy case. Chapter 7 caters only to discharge debts in existence, when the case commences.

In the case of Chapter 13, injury claims arising before or during the pendency of Chapter 13 bankruptcy need to be disclosed as an asset. If such claim arises after the case has already been filed, the debtor’s Schedule B needs to be amended to include disclosure of the claim.

If you have a personal injury claim and are being sued by your creditors, your best recourse is to file Chapter 13 bankruptcy. You get protection from automatic stay of bankruptcy

, where your creditors are prevented from all collection actions. What’s more, you retain counsel and get it approved by the bankruptcy court through your bankruptcy attorney. Once approved, it represents both your interests and that of the bankruptcy estate.

It is common for bankruptcy judges not to discourage personal injury counsel from representing you in bankruptcy. They also generally approve the contingency costs, unless they find it unfair under the factual circumstances.

Conclusion

In case you are proceeding with a personal injury case and are teetering towards bankruptcy and have filed bankruptcy under Chapter 7 or Chapter 13, it is most important to inform your attorney of the same. This will save you from avoidable complications and help your attorney in protecting your interests.

 

 

 

 

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