By Curtis Lee , J.D. Villanova University School of Law
Updated by Dan Ray , Attorney University of Missouri–Kansas City School of Law
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Both a personal injury (PI) claim and bankruptcy can be traumatic, anxiety-provoking experiences. It doesn't matter which side of the bankruptcy you're on. You'll find yourself dealing with courts, legal terms and rules, and procedures that, even under the best of circumstances, can be confusing and intimidating. Let's assume that you've got a PI claim. How might your or your opponent's bankruptcy, filed either before or after your PI claim arises, impact your claim? Let's take a look.
If you've got a PI claim and have filed or are thinking about filing for bankruptcy, you're probably wondering what will happen to your injury claim. Will you be allowed to keep your claim proceeds if you settle with or get a verdict against the other party?
The answer is: It depends. The first factor to consider is when your PI claim arose—meaning when you were injured. Did your injury happen before or after you filed for bankruptcy?
When you file for bankruptcy, you must list all your assets in your bankruptcy paperwork. Your assets include any lawsuits or claims for damages you have against another person, even if you've not yet collected any money. If you have a legal right to recover money against someone who hurt you in an accident, that's an asset you have to report in bankruptcy.
Example: PI Claim as an AssetSuppose you were badly injured in a car accident that was the other driver's fault. The wreck happened on May 1. On July 30, unable to work because of your injuries, you filed for bankruptcy. Your PI claim against the other driver is an asset. Chances are good that you'll collect your medical bills, lost wages, and related losses from the other driver's auto insurance. You must list the PI claim in your bankruptcy filing.
Where you're at in the claim process determines how you'll list the PI claim in your bankruptcy paperwork. For instance, if you haven't taken any action, you'll list a right to recover in a potential claim. If you've started the claim process, you'll list a pending personal injury insurance claim. When settlement talks have failed to produce a resolution and you've filed a lawsuit in court, you should list a pending personal injury lawsuit.
Perhaps you've resolved the claim via settlement. In that event, you should list cash settlement proceeds in your bank account or, if you're waiting for the settlement money, the right to collect settlement proceeds.
If the case went to trial and the court awarded you a judgment, list an uncollected money judgment (if you're waiting to collect) or the judgment proceeds in your bank account (if you've already collected).
Example: Listing Your PI ClaimRefer back to our example. When you file for bankruptcy, and assuming you've not done anything to actually start a claim (like send the other driver a notice of claim, for instance) you'll likely list in your bankruptcy paperwork a right to recover on a potential auto accident injury claim. If you've started the claim process, you should list a pending auto accident injury claim.
You might. You're allowed to protect some property in bankruptcy using laws called "bankruptcy exemptions." Your state decides whether you can use federal bankruptcy exemptions or your state's exemptions. State law might provide an exemption for all or part of your right to a personal injury award, or the cash proceeds of your personal injury claim in your bank account.
Most states will let you keep at least some portion of a personal injury award. The exemption language often refers to the amount you and your family need for support. Another option might be using a "wildcard" exemption you can apply to any property of your choosing.
A few states have cash exemptions, but when they're available, they're often minimal—like a few hundred dollars. You'll probably get to keep more if your state offers a personal injury exemption. Just be sure not to commingle the personal injury funds in your usual banking account. Keep the funds separate. To find out more about bankruptcy exemptions and how to use them, speak to a bankruptcy attorney in your area.
What happens to the nonexempt (not protected by a bankruptcy exemption) part of your PI claim depends on where it's at in the claim process. If you haven't already settled it when you file for bankruptcy, the bankruptcy trustee (a person appointed by the court to supervise and administer a bankruptcy) might take over the claim, but if that happens you'll need to participate.
Ultimately, the bankruptcy court will use the nonexempt proceeds of your PI claim to pay your creditors. How the court will pay creditors will depend on whether you file for bankruptcy under Chapter 7 or 13:
(Learn more about the differences between Chapter 7 and Chapter 13 bankruptcies, and whether you can keep the proceeds of a personal injury claim in a Chapter 7 bankruptcy.)
When your Chapter 13 bankruptcy is ongoing and you suffer a personal injury, you must disclose your PI claim to the bankruptcy court.
If you were hurt after filing for Chapter 7 bankruptcy, your PI claim won't be included in your bankruptcy. Note that the critical date is when the injury happened. If you were hurt before you filed a Chapter 7 bankruptcy, your PI claim is included, as discussed above.
In a Chapter 13 bankruptcy, you pay for the nonexempt property you choose to keep through a payment plan that usually takes between 3 and 5 years to complete. If you're injured while the bankruptcy is ongoing, you'll have to file amended bankruptcy paperwork to disclose your PI claim. To the extent that it's not protected by a bankruptcy exemption, the trustee will use the claim proceeds to pay your creditors.
When the party who injured you (who we'll call the "defendant") files for bankruptcy, the key factors are whether:
Let's start with a couple of important bankruptcy rules that will help you to understand what happens when the defendant in your PI claim files for bankruptcy.
The automatic stay is a bankruptcy court order that takes effect automatically on the filing of a bankruptcy case. The order "stays"—it temporarily puts on hold—lawsuits and other collection activities against the bankruptcy filer. As a rule, the stay remains in place until the bankruptcy case is over. The only way around the automatic stay is to ask the bankruptcy court to "lift" (remove) it.
The bankruptcy filer's ultimate goal in a bankruptcy case is to have the court "discharge" (meaning cancel) some portion of their debts. The kinds and amounts of debts that get discharged will depend on the type of bankruptcy case the defendant files, as well as the facts of the case.
There are a couple of possible exceptions to discharge that might apply when a PI claim is involved. More on those below.
When you're injured after the defendant has already filed for bankruptcy, the bankruptcy won't impact your PI claim. Here's why.
Because your PI claim arose after the defendant filed for bankruptcy, it's called a "post-petition debt." A post-petition debt isn't subject to the authority of the bankruptcy court. The defendant won't be able to rely on the automatic stay to stop you from pursuing the claim. And the debt from your personal injury claim won't be discharged in bankruptcy.
Example: Post-Petition DebtSuppose that Donna Defendant filed for bankruptcy on September 1. On November 1, Donna rear-ended you at a stoplight, causing you personal injuries and damaging your car. Because they arose after Donna filed for bankruptcy, your personal injury and property damage claims aren't part of Donna's bankruptcy case. You can pursue your claims just as you would if Donna hadn't filed for bankruptcy.
This situation—you're injured and while your PI claim or lawsuit is ongoing, the defendant files for bankruptcy—poses the greatest difficulties for your chances to collect on your claim. Here's the bottom line: If the defendant has enough insurance to cover your claim, you should be able to recover your losses. But to the extent that the defendant is underinsured or uninsured, chances are the debt the defendant owes you will be discharged in bankruptcy.
Get Legal Help and File a Proof of ClaimIf you find yourself in this situation, there are a couple of things you should do. First, discuss your options with a good bankruptcy lawyer. Second, be sure to timely file a proof of claim with the bankruptcy court. As the name suggests, a proof of claim establishes that you're making a claim against the defendant. If you don't file a proof of claim, you'll almost certainly lose your right to pursue it.
If the defendant is insured, you stand a good chance of collecting your damages. But you'll need the bankruptcy court's permission to move forward.
Example: Defendant Is InsuredLet's return to Donna Defendant and change the facts a bit. On June 1, Donna ran a red light at an intersection and collided with your car. You were injured and your car was damaged. Let's begin by assuming that Donna has enough auto insurance coverage to pay for your losses ("damages," as the law calls them). You weren't able to settle with Donna's auto insurer so you filed a lawsuit against her on October 15. On December 1, Donna filed for bankruptcy.
The automatic stay will put your lawsuit on hold. You should ask the bankruptcy court to lift the stay, pointing out that Donna's auto insurer is defending her and that her insurance will be enough to cover your damages. Because your lawsuit won't reduce the assets Donna has to pay her other creditors, the court likely will grant your request and allow you to pursue your case in court.
Unfortunately, things probably don't turn out so well when the defendant doesn't have insurance to pay for your injuries.
Example: Defendant Is Underinsured or UninsuredWhat if Donna Defendant doesn't have any insurance, or has only enough to cover part of your damages? To the extent that your claim isn't insured, odds are that it will be discharged in the bankruptcy, unless there's an exception that prevents discharge. After asking the court to lift the automatic stay, you should be allowed to pursue whatever insurance Donna has, but you probably won't be able to collect the uninsured portion of your claim.
Let's change our example facts one more time. Assume that your case against Donna Defendant went to trial. You won, and the court awarded you a judgment of $80,000. You've filed an $80,000 judgment lien against Donna's primary home. At this point, Donna filed for bankruptcy.
What happens to your judgment lien? The bankruptcy court will "avoid" (meaning reduce) the judgment lien if it "impairs" one of Donna's bankruptcy exemptions. A judgment lien impairs an exemption when the judgment lien, together with all other debts against the property plus the amount of the exemption, exceeds the value of the property.
Say Donna's primary home is worth $250,000. There's a mortgage against it in the amount of $150,000. Donna's state law allows a homestead exemption (an exemption that protects equity in a primary home) of $40,000. To see if Donna's homestead exemption is impaired, we do some quick math:
$250,000 (home value) - $150,000 (mortgage) - $80,000 (judgment lien) - $40,000 (homestead exemption) =
On these facts, all of the liens on the home plus the value of the homestead exemption exceeds the value of Donna's home by $20,000. The judgment lien impairs Donna's homestead exemption by that amount. As a result, the bankruptcy court will avoid the judgment lien by $20,000.
Debts arising from two types of personal injury claims don't get discharged in a bankruptcy case:
Injuries From Driving While Intoxicated
Bankruptcy law bars the discharge of debts arising from personal injuries caused by driving while intoxicated. The bankruptcy court cannot discharge these debts.
Injuries From Intentional Acts
The bankruptcy court is authorized to deny the discharge of debts arising from personal injuries caused by the defendant's willful, malicious, or intentional acts. To prevent the discharge of these debts, the plaintiff must object to the discharge. If the plaintiff doesn't object, or if the bankruptcy court disagrees with the plaintiff's objection, the court can order that these debts be discharged.
What happens if you were injured in a mass tort—a case that involves hundreds, thousands, or even tens of thousands of injury victims—and the defendant files for bankruptcy? Can you still get compensation if your injury happened before the defendant filed the bankruptcy case? While the answer depends on the facts, your chance of getting a settlement might be better than in the typical bankruptcy case. Let's find out why.
Several mass tort cases involving bankruptcies have made recent headlines, including:
Mass tort bankruptcy cases are different from the typical bankruptcy for several reasons. First and most important, the defendants are large, multinational organizations with significant wealth and assets. In many cases, the defendants can afford to settle with injury victims for a fair amount. Some of them choose to file for bankruptcy hoping to minimize the amount they'll have to pay. A number of courts have seen through this strategy, dismissing the bankruptcy case as improperly filed.
Second, because of the large numbers of injury victims, top-notch lawyers—working with the courts—make it relatively easy for you to file your claim in court. You need to be sure to file your claim by the filing deadline. But once you've done that you'll likely be prompted to take any additional steps that might be required, like providing documentation for your claim or your injuries.
Third, the lawyers representing the victims will work with the defendant to reach a global settlement of all claims. The defendant typically deposits cash into a victim compensation fund, and the proceeds of that fund are used to pay individual settlements. If you choose to accept the settlement, you'll sign a release and be paid for your claim. If you're not happy with the proposed settlement, you can opt out. If you opt out, you'll have to pursue a settlement (or other resolution) on your own.
Sometimes, the courts won't let a defendant file bankruptcy to settle mass tort claims. If the court is concerned that the defendant is misusing bankruptcy—shortchanging victims to get rid of debts it can afford to pay—the court can dismiss the bankruptcy case. This effectively forces the defendant to come back to the table with a fairer settlement proposal than the one the court rejected.
A bankruptcy can complicate your personal injury claim. In some cases, bankruptcy might wipe out your PI claim entirely. It's not a situation you want to navigate on your own, especially when there's so much to lose.
Your best bet will be to get expert legal help. A lawyer who's experienced with bankruptcy matters can guide you through the legal maze and help you find the best options for you and your case. Here's how to find an attorney in your area.