A personal injury claim may or may not be protected if you file for bankruptcy and will depend on several factors discussed below. Often, consumers thinking about filing for bankruptcy have suffered some sort of personal injury or have been involved in an accident. This could be due to a loss of wages or the accumulation of various medical debts.
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, it would be part of what is called the bankruptcy estate which includes all of a debtor’s assets. The personal injury claim must be listed in the bankruptcy documents and disclosed to a bankruptcy trustee as part of the bankruptcy process.
There are two types of personal bankruptcy that consumers file: 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 debtor’s 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 three to five years.
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 it. Any personal injury attorney working on a personal injury claim would need to communicate with the consumer’s bankruptcy trustee and attorney and not pay settlement money prior to 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.
In Washington 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 $125,000 in equity in the home.
Federal bankruptcy exemptions allow for $13,900 (or twice that amount, in some cases) in wildcard protection (used on whatever a debtor wants, including personal injury claim or bank accounts). Additionally, there is a personal injury exemption of $25,150, but this is limited to future care costs and does not cover pain and suffering or pecuniary loss. Most of the federal bankruptcy exemptions can be found at 11 USC §522.
Washington 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 exemptions say future payments must be reasonably necessary for the debtor’s care. The state wildcard exemption is also very low at $3,000.
Whether somebody can protect personal injury proceeds depends on the amount they can expect in a settlement and the value of their 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.
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.
In closing, 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 the personal injury attorney, bankruptcy attorney, and a trustee appointed to the bankruptcy case if one has already been filed.