Ouch! Protecting Your Personal Injury Claim in Bankruptcy

Personal injury claims are exempt in Chapter 7 and Chapter 13 bankruptcy up to a point. Unfortunately, such claims are sometimes lost entirely because the debtor failed to disclose the claim or did not know how to protect it. It is bad enough to be injured in an accident, but losing your claim for compensation as well can be devastating. Fortunately, there are steps you can take to preserve your personal injury claim in bankruptcy.

What Is A Personal Injury Claim?

A personal injury claim is any claim that you may have against a person, business, insurance company, or anyone else because of a physical injury. Examples include claims arising from a car accident, a slip-and-fall, medical malpractice, a dangerous product, assault and battery, a work-related accident (see workers' compensation below), or any other incident resulting in injury.

Disclose, Disclose, Disclose

All personal injury claims are assets, just like your car, furniture, and other personal property items, and you must disclose them in your schedules. Failing to disclose an injury sustained before filing may lead to the loss of any recovery to which you might be entitled. Even if the failure to disclose is unintentional, it may not save your claim. Instead of compensating you for your injury, the funds will be distributed among your creditors. Moreover, intentionally failing to list an asset can leave you open to criminal liability.

Quick Note: It is the date that the claim arose (usually the date of injury), not the date of the award or settlement, that determines whether the award or settlement is part of the bankruptcy estate. If you were injured before filing but will not receive compensation until after filing for bankruptcy, you must still disclose the claim.

Sadly, many claims lost for failure to disclose would have been exempt, had the debtors listed the debt. By attempting to protect the claim by not disclosing it, the debtors in such cases lose out. (The courts have taken a hard line of late on undisclosed assets, even in cases where the entire claim would have been exempt had it been reported.)

Some debtors believe that they do not have to disclose an injury or potential claim, as long as they do not file suit until after bankruptcy case has closed. They are wrong. If the injury happened or claim arose before the debtor filed for bankruptcy, the debtor must disclose it to the trustee.

Anyone tempted not to disclose a personal injury claim (or any other claim) should know that bankruptcy trustees regularly check court records after the bankruptcy case closes. Trustees can and will discover if debtors have filed a personal injury case based on a pre-filing injury. In fact, I have spoken to trustees who have located and seized personal injury awards years after the debtor received a discharge and the bankruptcy case was closed.

Quick Note: In most cases where a case is pending, trustees will allow you to keep your current personal injury attorney. Most trustees will simply ask you to provide a letter from your personal injury attorney stating the attorney's opinion of the value of the case and the likelihood of recovery. However, because the claim is part of the bankruptcy estate, the trustee can instead choose to retain another attorney to pursue the claim. The trustee may even settle the case for less than you would have taken.

Post-Filing Injuries

If an injury happens after you file for Chapter 7 bankruptcy, it is not part of the bankruptcy estate. You can keep any award or settlement.

In Chapter 13, trustees typically treat awards and settlements arising from post-filing injuries as income or windfalls. Therefore, if the award is for more than your exemption amount, you may have to increase payments to the creditors. However, unlike Chapter 7, you can dismiss a Chapter 13 at any time if you do not like the result.

Exempting a Personal Injury Claim

Bankruptcy exemptions can protect all or part of the proceeds of a damages award or settlement. Under the personal injury exemption of bankruptcy code, you can keep up to $23,675 from a personal injury award or settlement, not including pain and suffering or compensation for monetary losses. 11 U.S.C. 522(d)(11)(D). This number may double to $47,350.00 for a couple filing together if both spouses are plaintiffs.

As a Pennsylvania bankruptcy lawyer, I usually advise my clients who have personal injury claims to use the federal exemptions, which are much larger than our state exemptions. (Some other states have more generous personal injury exemptions.)

Although the federal exemption is limited and does not exempt compensation for pain and suffering and actual pecuniary (monetary or actual losses), there are often other ways to protect your claim.

Stacking Exemptions – The Wildcard

In addition to the personal injury exemption, if your claim is over the amount allowed by the personal injury exception, you can apply the federal "wild card" exemption, which will allow you to exempt more. The wild card exemption includes a basic exemption of $1250 plus up to $11,850 of any unused homestead exemption. Thus, if you do not use all of your homestead exemption, the potential total wildcard exemption is $13,100, which you can apply to any personal property, including a personal injury claim or award. A debtor can use the wildcard exemption in addition to other exemptions. For example, by "stacking" the personal injury exemption of $23,675, the wild card of $1225, and the unused homestead exemption of $11,850, you have a total exemption of $36,775.

Joint Cases

With other property, a married couple can often double up on exemptions in bankruptcy. However, bankruptcy courts in Pennsylvania and elsewhere have ruled that a debtor must have an interest in the property to claim an exemption. Unfortunately, a personal injury award or settlement is specific to the injured party only. Therefore, if only one spouse received the award or settlement, you cannot double up on your personal injury exemptions or any portion of the wildcard exemption applied to the award.

Quick Note: How an award or settlement agreement characterizes the damages can impact whether the funds are exempt. Therefore, you must make sure that your bankruptcy attorney, the personal injury attorney, and you are all on the same page. Your bankruptcy attorney should contact your personal injury attorney directly to assess the case.

Attorney's Fees and Costs

The fees and costs that you pay to your personal injury attorney do not count as part of your award. You must exempt only the amount paid to you after the personal injury attorney's fees and costs.

Example: Joe accepts a settlement of his personal injury for $32,000. Joe's attorney takes a fee of one-third of the recovery or $10,000 and costs of $2000. Joe receives $20,000 after attorneys fees and costs. Joe must exempt only the $20,000 that he received, not the entire $32,000.

Medical Bills

You must list all outstanding pre-filing medical bills as debts in your schedules, including any liens that the creditors claim on your personal injury award. However, in general, you cannot reduce your award by the amount of medical debt.

Example: Joe receives $50,000 after attorney's fees and costs. However, he owes medical providers $20,000. Joe cannot claim that his award was only $20,000. For bankruptcy purposes, his personal injury award is $50,000. Joe may want to consider whether it is better to negotiate a settlement for much less than the balances owed rather than pursue bankruptcy.

Can You Discharge Your Debt In Bankruptcy Then Settle Your Case?

Debtors with personal injury claims sometimes ask if they can file for bankruptcy, discharge the medical debt, then settle the case and keep all of the award. In short, even if you could, it is unlikely to benefit you. You can certainly file for bankruptcy before the case settles. However, you must still list the personal injury claim, regardless of whether you have filed suit or even hired an attorney.

Moreover, no matter how much the award is, the amount you get to keep is limited by your exemptions. Thus, even if you discharged the medical debt, anything over your exemption amounts would go to creditors. The only way you would receive more than your exemptions is if your creditors received payment in full from the settlement, in which case you would receive the remainder. Also, to the extent that any of your medical debts are secured, they must still be paid from the settlement's proceeds. (See Medical and Insurance Liens below.)

Medical and Insurance Liens

Some of your medical providers or insurers may have secured claims that cannot be discharged in bankruptcy. A medical provider's claim is secured if the debtor gave the provider a lien against any settlement (typically, in exchange for providing services), or the provider has obtained a judgment.

Of more concern are the liens of medical insurance companies. Although auto insurance companies cannot claim reimbursement for medical debts paid on behalf of the insured, the amount of coverage provided is typically quite small. Therefore, the injured person usually looks to his or her health insurance company for compensation. In Pennsylvania, a health insurer has a right to reimbursement ("subrogation") from its insured's personal injury settlement or award. Medicare, Medicaid, the VA, etc., may have subrogation rights as well. In bankruptcy, such claims are secured debts if properly made.

Of course, most claims by medical providers and insurers are subject to negotiation. Therefore, your personal injury attorney may be able to maximize your award or settlement by getting the medical providers and insurers to accept a lesser amount.

To the extent that medical debt is not secured by a lien, judgment, or right of subrogation, it is dischargeable in bankruptcy. However, there are many complexities to the area of liens and subrogation rights. Take care to see that your personal injury attorney and bankruptcy attorney have experience in these areas.

What If I Spent The Money Before Filing?

I am often asked if the trustee can go after funds from a personal injury award or settlement if the debtor received and spent the funds before filing for bankruptcy. In most instances, if the debtor spent the money in the ordinary course of business over time (e.g., for living expenses, etc.), it is unlikely that the trustee would be able to get to the funds.

On the other hand, if the money was used to pay off favored creditors, transferred to a family member, or otherwise transferred in a suspicious way (particularly within a year of filing), the trustee may be able to claw back the payments from the recipients. It may also give the appearance of bankruptcy fraud if it looks like you are hiding assets. You should certainly discuss the matter with your bankruptcy attorney before filing.

Other Exemptions

Although they do not apply in all cases, some additional exemptions may be available. For example:

Crime Restitution. If the injury resulted from a crime, any award from a crime victim reparation fund is exempt. 11 U.S.C. 522(d)(11)(A)

Wrongful Death. Payments for the wrongful death of someone of whom the debtor was a dependent are exempt "to the extent reasonably necessary" to support the debtor and the debtor's dependents. 11 U.S.C. 522(d)(B)

Life Insurance Benefits. Life Insurance benefits are exempt if the debtor was a dependent of the insured and the funds are reasonably necessary to support the debtor and the dependents of the debtor.11 U.S.C. 522(d)(C)

Loss of Future Earnings. If the payment is for loss of future earnings of the debtor or someone of whom the debtor was a dependent, the award is exempt provided that the payment is reasonably necessary to support the debtor and the debtor's dependents. 11 U.S.C. 522(d)(11)(E)

Workers Compensation. Many workplace injuries fall under workers' compensation laws. Awards and settlements in workers' compensation cases may be exempt in whole or in part under other bankruptcy exemptions. 11 U.S.C. §522(d) (10)(C)

Children's Claims. In Pennsylvania, a child's claim is not the property of the parent in most cases and is, therefore, not part of the bankruptcy estate (although you should note it in the Statement of Financial Affairs). In cases involving an injured child, the language of the settlement is particularly important.

Don't lose your right to compensation for an accident. If you have been injured in any way, it is critically important to (1) tell your bankruptcy lawyer about any potential claim you may have (even if you think it is recovery is unlikely), and (2) inform your personal injury lawyer that you are considering filing for bankruptcy. Then, your attorneys can work together to reach the best possible outcome for you.

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Philadelphia Bankruptcy Attorney is published by Harborstone Law. Harborstone Law represents clients in bankruptcy and debt relief cases throughout Philadelphia and the surrounding Pennsylvania counties.

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Dan Mueller is a bankruptcy attorney and partner at Philadelphia-based Harborstone Law. Dan helps people and small businesses resolve serious financial and legal issue through bankruptcy and non-bankruptcy debt solutions.
Paul Midzak focuses his practice on debtor defense, dispute resolution, consumer protection law, and Chapter 7 and Chapter 13 bankruptcy. He also advises businesses on a variety of legal matters.
Harborstone Law represents clients in bankruptcy, debt, consumer, and small business matters throughout Philadelphia, Montgomery, Delaware, Chester, Bucks, Berks, Lancaster, Lehigh, and Northampton Counties in Pennsylvania.
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