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DOES A PERSONAL INJURY SUIT AFFECT A BANKRUPTCY?

Injuries can happen at any time. Sometimes, the injury causes financial difficulties which lead you to consider bankruptcy. Sometimes, the injury comes after you filed a bankruptcy. Whether the personal injury suit (or potential suit) affects a bankruptcy depends on a variety of factors including the timing of the injury, the extent of the injury, the bankruptcy chapter at issue, the location of the injury, and the location of the bankruptcy filing.

What if the injury occurred before filing bankruptcy?

If you were injured prior to filing a bankruptcy petition, whether or not a lawsuit is filed, that injury is “property of the bankruptcy estate”. That means the bankruptcy trustee may be able to use the proceeds from a potential suit to pay your creditors some or all of what they are owed.

If you file a Chapter 7 bankruptcy after you are injured, the Chapter 7 trustee takes total control of your lawsuit or your right to file a lawsuit. You are no longer able to make decisions such as whether to file suit, whether or not to settle the case, or what amount of money you would accept to settle the case. The Chapter 7 trustee stands in your shoes for the purposes of the injury.

Many people think that if they don’t file a lawsuit before filing the bankruptcy that they can avoid disclosing the asset or having it seized by the trustee. This cannot be further from the truth. To start, failing to list a potential lawsuit on your bankruptcy schedules can act as a complete and total bar from ever filing suit. That means you could potentially get nothing as a result. Additionally, purposefully failing to include a potential asset on our bankruptcy schedules can be criminal and can result in jail time, fines, and a revocation of your bankruptcy discharge. Finally, the trustee can ultimately take over your case anyway even after the bankruptcy case is closed if the injury occurred before the bankruptcy petition was filed.

In a Chapter 13 bankruptcy, things are different. You retain control over the lawsuit for the most part. You would simply need to obtain court approval prior to settling the case. You may also have to pay a portion of your injury proceeds to the Chapter 13 trustee to use to pay your creditors.

In either chapter, you would likely get to keep at least a portion of your injury award using “exemption”. The amount of the exemption available varies from state to state and also depends on other property you own. Many people get to keep their entire settlement. It is important to discuss your specific circumstances with a bankruptcy attorney prior to filing a petition. Once filed, it cannot always be undone. Stopping a Chapter 7 bankruptcy can be like stopping a boulder from rolling downhill.

What if the injury occurred after filing bankruptcy?

If you filed a Chapter 7, any proceeds from an injury that occurs after the filing of the bankruptcy is yours and only yours. The proceeds from this injury are not property of the Chapter 7 estate.

On the other hand, if you are injured after filing a Chapter 13 bankruptcy, but before the case is closed, the proceeds are property of the bankruptcy estate. In this case, you would essentially treat the proceeds as if you had the injury prior to filing. You may get to keep all or part of the proceeds depending upon your available exemption. There may be other options for you in a Chapter 13, but you must consult with a bankruptcy attorney in your area.

If you are considering filing for bankruptcy, it may be a good idea to talk to bankruptcy attorney Pennsylvania trusts first. He or she can provide you with more information about bankruptcy and what can happen to your personal injury settlement within a bankruptcy.

Thanks to our friends and contributors from ARM Lawyers for their insight into the effects of a personal injury award on bankruptcy.