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A Personal injury claim may or may not be protected if you file for bankruptcy and will depend on several factors discussed below. Often times consumers thinking about filing bankruptcy have suffered some sort of personal injury or have been involved in an accident which may result in them having to file for bankruptcy. This could be due to a loss of wages or various medical debts as part of the accident which have added up.

In general, if a consumer suffers a personal injury prior to the filing of a bankruptcy case and think they may have a personal injury claim against somebody for payment, it would be part of what is called the bankruptcy estate which includes all of a debtors assets.  The personal injury claim must be listed in the bankruptcy documents and disclosed to a bankruptcy trustee as part of the bankruptcy process.

Does the type of Bankruptcy Affect How Much of My Personal Injury Settlement I Can Protect?

There are 2 main types of personal bankruptcy that consumers file. These are chapter 7 bankruptcy, a liquidation case in which no payments are made to creditors and you are allowed to keep a limited amount of assets subject to rules called exemptions (discussed below), and chapter 13 bankruptcy which is a personal reorganization plan in which debts are paid based on a debtors ability to pay, family size and the value of assets subject to the various exemptions.

If the value of the personal injury claim is not exempt (protected), then a trustee in a chapter 7 case can step into the shoes of the debtor and settle a claim for the debtor and use funds above those exempted to pay a debtor’s creditors. In a chapter 13 case, no assets are liquidated or sold, but the non-exempt value of the claim must be paid back to creditors as part of a payment plan that lasts 3-5 years. Therefore the type of bankruptcy will not affect how much of your personal injury claim you can protect, but it can allow you to spread out the payment of what you might owe over 3-5 years in a chapter 13 bankruptcy.

Does It Make Sense to Settle a Personal Injury Claim Prior to Filing Bankruptcy?

My advice to most consumers who have suffered a personal injury and believe they have a claim that will entitle them to damages is to get through the Personal Injury claim process first and then consider filing for bankruptcy to resolve any other lingering debts.  With that said, at the time of filing bankruptcy a debtor can’t have a large amount of funds sitting in their bank accounts (subject to exemptions below) so they may need to postpone filing a bankruptcy or file a chapter 13 bankruptcy instead if the funds will not be protected to allow for payments over 3-5 years.

Receiving personal injury fund within 6 months of filing for bankruptcy could also count as income on the bankruptcy means test and determine if a consumer will qualify for chapter 7 bankruptcy or could increase the amount that needs to be paid to unsecured creditors in a chapter 13 bankruptcy.  Therefore it may make sense to wait 6 months from the date of receiving any funds to file for bankruptcy.

If a bankruptcy case is filed after the personal injury accident occurred, then a bankruptcy trustee in chapter 7 now owns the claim and makes decisions on how to handle the claim.  Any personal injury attorney working on personal injury claim would need to communicate with the consumers bankruptcy trustee and attorney and hold out paying settlement money prior trustee and court approval.

Furthermore, all attorneys hired by the client post-bankruptcy filing require court approval to work on the case.  In a chapter 7 case, the bankruptcy trustee typically seeks employment for the bankruptcy estate, while in chapter 13 bankruptcy, the consumer through their bankruptcy attorney would need to seek to employ their personal injury attorney through the bankruptcy court.

How Much of My Personal Injury Settlement will I Be Able to Keep if I file Bankruptcy?  

If the personal injury claim is a low dollar amount claim, a consumer may be able to keep the proceeds of the claim.  In bankruptcy, rules called exemptions are used to protect a debtors assets up to a specific amount.  In Washington State we can use Federal or State Exemptions but can’t combine them. If a consumer owns a home with equity, they are likely going to be using the state exemptions to protect up to the median sale price in their county in equity in the home. This can be greater than $838,300 in equity that can be protected.

Federal bankruptcy exemptions allow up to $15,425 (multiplied by 2 for a couple) in wildcard protection (used on whatever a debtor wants including personal injury claim or bank accounts).  Additionally, there is a Personal injury exemption of $27,900 but this is limited to future care costs and does not cover pain and suffering or pecuniary loss. Here is the full list of federal bankruptcy exemptions.

Washington State bankruptcy exemptions say a person can protect up to $20,000 with the same restrictions as the federal bankruptcy exemptions which say the exemption is only for use with future care. Also, Washington State exemptions says future payments must be reasonably necessary for the debtor’s care.  The state wildcard exemption is also very low at $3,000. Here is the full list of Washington State bankruptcy exemptions.

Therefore, whether somebody can protect personal injury proceeds depends on the amount they can expect in a settlement and the value of a person’s assets in general which will determine how much they can exempt. It also should be noted there are other bankruptcy exemptions other than the wildcard or personal injury exemptions to protect other assets.  Consumers should review the list of exemptions above.

As a general rule of thumb when settling a personal injury claim, knowing a consumer may file bankruptcy, it is advisable to have the insurance company clearly breakdown what the payments are for as part of any personal injury settlement.  For bankruptcy purposes it would help if the damages were labeled as payment for the future care of the person rather than pain and suffering or pecuniary loss.  Trustee’s in a chapter 7 bankruptcy will try to go after funds if the settlement is not specific or covered by the allowed exemptions as it is their job to recover funds on behalf of creditors.  They are also incentivized to recover funds as they get a percentage of any recovery.

What if I Suffer a Personal Injury After My Bankruptcy Case is Filed?

If a consumer suffers a personal injury claim after their bankruptcy case is filed the result, will depend on what type of bankruptcy was filed. In a chapter 7 bankruptcy case, the claim would be outside the bankruptcy estate and not subject to the bankruptcy trustee’s reach or liquidation. On the other hand, if a debtor has filed chapter 13 bankruptcy, any new value would have to be reported to the chapter 13 trustee and the non-exempt funds committed to paying back a debtor’s creditors.

What if I Was involved in a Personal Injury Accident But Don’t Have Any Claims. Can I Be Liable for the Debt Incurred in the Accident?

If you were involved in an accident and did not have insurance for instance, you may be sued by an insurance company in an effort to recovery damages for the insured driver.  If a judgment is obtained, a creditor can garnish up to 25% of a paycheck and your license can be suspended. A judgment can last for up to 10 years and then can be renewed for another 10 years. The good news is that you may be able to discharge the debt in bankruptcy if you qualify for chapter 7 or chapter 13 bankruptcy.  With that said, if the injury was incurred due to DUI (criminal acts) or was a voluntary action, it may not be dischargeable in bankruptcy.  

As you can see from reading this article, whether a consumer can protect a personal injury claim as part of a bankruptcy case depends on several factors and will require the cooperation of your personal injury attorney, bankruptcy attorney and a trustee appointed to your bankruptcy case if you have already filed your case. If you do have a personal injury claim, live in Washington State and are thinking about filing for bankruptcy, feel free to contact a bankruptcy attorney with Symmes Law Group at 206-682-7975 or contact us to get the counsel you need.

  • Richard Symmes

    Hi, Richard here.

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