No one ever wants to be involved in an accident, but unfortunately, they happen all the time. As the medical bills and other expenses start to pile up because of an Injury and/or inability to work, many seek relief by filing for Bankruptcy to manage all of the debts that they have accumulated during this period. In fact, medical bills and debts arising from medical treatments not fully covered by insurance are among the chief reasons our San Jose bankruptcy attorneys see people needing to file Chapter 7 or 13.

What happens to the money one might receive from a Personal Injury award or settlement if he files a bankruptcy case? As I’ve written before, upon filing bankruptcy, every interest in any kind of asset that the debtor might have becomes part of the “bankruptcy estate” under 11 U.S.C. §541(a). This includes claims or causes of action arising from a personal injury and the right to receive awards or settlements from such an injury. To be clear, even if one has not yet filed a personal injury lawsuit before filing a bankruptcy case, he must still disclose to the bankruptcy trustee that he may have a claim. In other words, even if one hasn’t yet received a penny for his injury, he cannot hide the fact that he may in the future receive such an award. It is not good enough to simply delay the filing of his personal injury lawsuit so that the bankruptcy trustee and creditors cannot get to any settlement proceeds. Concealing the fact that one had an injury and a reason to sue for it can still constitute fraud in bankruptcy.

Personal Injury Claims and Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy case, any lawsuit one may have filed with a personal injury attorney, or any claim that one might have to file a such a lawsuit against another is considered to be an asset of the bankruptcy estate. If one files for bankruptcy in California, she is allowed to claim “exemptions” to protect certain assets or property she might own in order to keep at least a portion, and in many cases all of her assets. As a simple example, let’s say Sarah was rear-ended by another motorist, and she sues him in Santa Clara County Superior Court and receives a settlement of $25,000. Sarah needs to file for bankruptcy, however, because her debts far exceed this settlement, and she is out of work. So, Sarah files Chapter 7 bankruptcy in San Jose. Under California’s 703 or “wildcard” exemptions, she may exempt “a payment, not to exceed twenty-four thousand sixty dollars ($24,060), on account of personal bodily injury of the debtor or an individual of whom the debtor is a dependent.” Hence, this exemption will protect nearly all of your personal injury settlement. The remaining amount of $940 could then be exempted using any unused portion of the “wildcard” exemption ($25,340 as of January 1, 2013). In this example, Sarah will be able to keep all of her personal injury settlement. Also, in some cases, even if the debtor does not have sufficient exemptions to protect a possible future personal injury settlement or award, the Chapter 7 bankruptcy trustee may abandon the debtor’s claim if he or she thinks that the settlement will be greatly reduced after the debtor’s personal injury attorney’s fees and medical liens are paid out.

Personal Injury Claims and Chapter 13 Bankruptcy

In a Chapter 13 Bankruptcy case, the debtor does not have to worry about giving up any assets. Chapter 13 is primarily a debt repayment plan where the debtor pays a portion of his debts over a 3 or 5 year period. A personal injury settlement received can—if it exceeds the amount that would have been exempt in a Chapter 7 case—cause the overall amount that the debtor must pay through his Chapter 13 plan to increase under the “liquidation test” applicable in Chapter 13 bankruptcy and depending on whether he is likely to need the settlement to pay for his support and any future medical treatment.

In any case, it is critical for anyone considering filing bankruptcy who may have a personal injury claim that he inform his bankruptcy attorney about this claim so that the bankruptcy and personal injury attorneys can work closely together in order to preserve and protect as much of any settlement as possible.

Our San Jose bankruptcy attorneys always offer free initial consultations to Bay Area residents considering filing for bankruptcy protection. Just pick up the phone and give us a call.