A common question that I come across due to my bankruptcy background is the effect of filing a bankruptcy on personal injury awards . To determine how a personal injury award will be handled in bankruptcy, one must first determine the timing of the injury (whether before or after the bankruptcy filing), and more importantly, the timing of the personal injury award (whether the settlement award or the award following was received before or after the bankruptcy filing). Another point of consideration is whether the bankruptcy filed was a chapter 7 or a chapter 13. Below I will discuss some important concepts linking personal injury and bankruptcy.
Exemptions and Their Relationship to Personal Injury Awards
One must know how exemptions work before understanding how personal injury awards are handled when a bankruptcy is filed. Exemptions allow individuals to “exempt” certain amount of equity in a property from creditors’ reach. Exemption amounts are set by state and federal laws. There are different exemption amounts for different properties. For example, there is a homestead exemption, which effectively allows an individual to keep a certain amount of the equity in his home from creditors. There are also other exemptions that pertain to personal property such as jewelry and cars.
In California, a debtor does not have choice to either use federal exemptions or state (California) exemptions. In California, a debtor must use California exemptions. There are two (2) “systems” of exemptions in California, and only one of those systems can be used by a debtor when filing a bankruptcy. A qualified bankruptcy attorney can determine which of these systems of exemptions will be more beneficial to the bankrupt debtor.
State (California) Exemptions
In California, a debtor who filed for bankruptcy must choose whether he/she will use “System 1” or “System 2” of the California exemptions. Under System 1, a debtor can exempt an award of damages from a personal injury claim, without any specific limit, to “the extent necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor”. See C.C.P. § 704.140. However, if one of the debtor’s creditors is a health provided whose claim is based on providing health care for the personal injury for which the award or settlement was made, the award of damages will not prevent that creditor from collecting in the bankruptcy (and the personal injury award will not be “exempt” from that creditor). Similarly, for wrongful death claims, an award of damages or a settlement arising out of the wrongful death of the debtor’s spouse, or a dependent of debtor or debtor’s spouse is exempt “to the extent reasonably necessary for support” of the judgment debtor, his/her spouse, and his/her dependents. See C.C.P. § 704.150.
Assuming that the debtor or their attorney choose to use System 2 exemptions as opposed to System 1, the damage award for a personal injury claim will be exempt only up to $24,060. See C.C.P. § 703.140(b)(11)(D). It is not unlimited like System 1. However, a payment to compensate the debtor for loss of future earnings is exempt, without specific limitations, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. See C.C.P. § 703.140(b)(11)(E). Similarly, for wrongful death claims, an award of damages or a settlement arising out of the wrongful death of the debtor’s spouse, or a dependent of debtor or debtor’s spouse is exempt, without any specific limit, “to the extent reasonably necessary for support of the judgment debtor and the spouse and dependents of the judgment debtor.” See C.C.P. § § 703.140(b)(11)(B).
Personal injury awards contains many components, such as reimbursement for medical bills, pain and suffering, loss of future earnings, and more. It is also important to consider what component of the personal injury award will not be exempt, and could be in reach of creditors. Generally, any component of the personal injury award that is attributed to “pain and suffering” or for the attorneys’ fees is not exempt.
Chapter 7 Cases
In Chapter 7 cases, exemptions play a large role on how personal injury awards will be treated. When filing a Chapter 7 bankruptcy, a Trustee is immediately appointed by the Court. One of the Trustee’s “jobs” is to take all valuable assets of the bankruptcy debtor, liquidate those (if possible), and then distribute the money generated (if any) to other creditors. Nonetheless, if there are exemptions that protect certain assets from creditors, the Trustee could not (and would not) liquidate those assets. That is when personal injury awards come in. If the award is fully exempt, the Trustee would not be able to reach the award and use it to pay creditors.
The above-discussion above exemptions and the role of the Chapter 7 Trustee pertains to personal injury awards that a debtor obtained prior to the filing of a bankruptcy. Any such awards must be listed on debtor’s schedules (which are filed in the initial stage of the bankruptcy), and any pending litigation must also be listed on the documents filed in the initiation of the bankruptcy. Disclosure of personal injury awards or pending lawsuits is required when filing a bankruptcy! Failure to do so can subject a debtor to sanctions or a dismissal of the case.
The above discussion mainly relates to situations where a personal injury award was received by a bankrupt debtor before the filing of a bankruptcy. But, what if an injury that gives rise to a personal injury claim occurs after the bankruptcy filing? In such a case, any award will belong to the Debtor and Debtor will not be at risk of having his/her creditors going after that potential award.
Chapter 13 Cases
In Chapter 13 cases, when an injury had taken place and when an award is expected, become more important and must be considered carefully. Chapter 13 cases are filed when a debtor seeks to reorganize his/her debts as opposed to liquidating everything as one can in a Chapter 7. In a Chapter 13, all income that a debtor receives following the bankruptcy filing may be used to pay creditors (unlike a Chapter 7). Thus, if a personal injury award is expected following the filing of a Chapter 13 case, some (or maybe all) of said award may be used to pay the other creditors as part of the “good faith” requirement in a Chapter 13. For this reason, bankruptcy planning with a qualified bankruptcy attorney is very important.
What if No Claim for Damages Was Initiated Before the Filing of a Bankruptcy?
As set forth above, a debtor must list all pending lawsuits and claims that he/she may have at the time of filing a bankruptcy in the Schedules. However, what if a debtor sustained a life-changing injury right before the bankruptcy filing, and no claim was made to the insurance company of the negligent party? Upon the filing of a Chapter 7 case, the property of the debtor becomes the property of the estate. Thus, a the appointed Trustee of the bankruptcy estate may decide to pursue the injury claim and commence litigation on behalf of the bankrupt debtor’s estate. The bankruptcy trustee will then have the right to negotiate and approve a settlement (subject to approval by the Court). The Trustee will likely choose the attorney of his/her choice, and fees that the trustee charges (in addition to attorneys’ fees) will be deducted from the personal injury award.
Pending Litigation and the Automatic Stay
An automatic stay pursuant to 11 U.S.C. § 362 arises when a debtor files a bankruptcy (whether it is a Chapter 7 or a Chapter 13). If a Debtor files a bankruptcy while in the middle of a personal injury litigation, the automatic stay may postpone that litigation. The automatic stay does not necessarily affect a debtor’s right to pursue the injury claim against the person or party who caused the injury, but it might affect the ability of the other party to file or litigate counterclaims against the debtor.
Consult With A Qualified Attorney Now!
Knowing how to handle a personal injury claim when a bankruptcy is filed can be a daunting task for individuals or attorneys who are not qualified in either of these areas. Katz Law is here to help those who were injured in an accident and are considering filing for bankruptcy. At Katz Law, we are qualified in handling both personal injury and bankruptcy cases, which makes us unique in our abilities. If you have been hurt in a car accident, or need bankruptcy advice, contact a Los Angeles attorney now! Our attorneys at Katz Law is ready to help you immediately!
Call us now at (844) KATZ-LAW for a FREE CONSULTATION!