Last updated: October 19th, 2020
Reading time: 10 minutes
One breath summary: Any injury claims or injury compensations must be declared in the bankruptcy proceedings. Depending on the timing and chapter of bankruptcy it may be seized as part of your estate. We advise talking to a qualified attorney to fully understand your rights and exemptions which can protect a significant part of your money.
For brevity, this article will refer to your right to seek compensation from another person or party for injuries to you as an “Injury Claim”. Likewise, this article will refer to the the money that you obtain or might obtain from another person, whether through a lawsuit or an out-of-court settlement, as the “Injury Compensation”.
The Timing of your Injury:
The first factor to consider is whether the injury that gave rise to your Injury Claim occurred before or after you filed your petition for bankruptcy protection.
If your injury occurred before your bankruptcy petition was filed, then your Injury Claim is part of the bankruptcy estate and must be disclosed in your bankruptcy paperwork. As discussed below, all or part of the Injury Claim may be protected by an exemption; but, if any part of the Injury Claim is not protected by an exemption, the bankruptcy trustee may investigate and pursue the Injury Claim.
If your injury occurred after your bankruptcy petition was filed, then your Injury Claim is generally not part of the bankruptcy estate. That means neither the bankruptcy trustee not your creditors have a claim against your Injury Claim; you are entitled to pursue the Injury Claim and keep any Injury Compensation that you obtain. However, if you are in a reorganization bankruptcy, such as a Chapter 13 payment plan, your obligations of fairness and good faith might require you to turn over some or all of the compensation to the bankruptcy trustee for distribution to your creditors. This situation is complicated and should be discussed with your bankruptcy attorney.
The Timing of your Injury Compensation:
The second factor to consider is the whether you receive your Injury Compensation before or after you filed your petition for bankruptcy protection.
If you received your Injury Compensation before the bankruptcy petition was filed, then the Injury Compensation that you have received is part of the bankruptcy estate and must be disclosed in your bankruptcy paperwork.
If you will receive your Injury Compensation after the bankruptcy petition was filed, then your right to receive the Injury Compensation is part of the bankruptcy estate and must be disclosed in your bankruptcy paperwork.
In both of these scenarios, all or part of your Injury Compensation may be protected by an exemption, as discussed below. However, if any part of your Injury Compensation is not protected by an exemption, the bankruptcy trustee may seize the non-exempt portion of the Injury Compensation and distribute that portion to your creditors.
As discussed in another article, exemptions are legal protections that protect some of your assets from being seized and used to pay your creditors. Some of those exemptions could protect all or part of your Injury Claim or your Injury Compensation. For example, in Oregon, you can protect 100% of any money or property that is traceable to a crime victim’s reparation award. Likewise, you can protect up to $10,000 of money or property that is traceable to a personal bodily injury. It is important to note that the personal injury protection applies only to bodily injuries, not monetary harm (like a breach of contract) or damage to reputation (like slander or libel).
If you have already received the Injury Compensation, it is important that you keep those funds separate and identifiable. As mentioned above, to qualify for these exemptions, the funds must be “traceable”. For example, imagine that you receive $10,000 of Injury Compensation and you deposit into your regular bank account, along with your wages and other money. Your Injury Compensation is “polluted” by the other money and it becomes difficult to tell which dollars are which. That may result in you not being able to protect all or part of your Injury Compensation with an exemption. So, if you know that you will be receiving Injury Compensation, it is wise to deposit those funds into a new, separate bank account, so it is easier to identify the source of those funds and claim the exemption protection.
Any Injury Claim or Compensation Must be Disclosed in your Bankruptcy Paperwork:
People who are filing for bankruptcy protection sometimes accidentally or intentionally omit assets, such as Injury Claims, from their bankruptcy paperwork. If you fail to list an Injury Claim or Injury Compensation in your bankruptcy paperwork, it can cause many problems. Accidental omissions are fairly simple to correct. However, intentional omissions that are later discovered may have severe consequences, including the loss of your right to protect your Injury Claim or Injury Compensation with an exemption, a potential loss of your bankruptcy discharge, and a potential loss of the ability to pursue the Injury Claim. As a result, the best policy is to carefully consider any potential claims against others and make sure those claims are listed in your bankruptcy paperwork. For more information, please look for a future article about omitted assets.
The Bankruptcy Trustee May Pursue your Injury Claim:
Once you have filed for bankruptcy protection, your Injury Claim is a part of the bankruptcy estate. That means you technically no longer own the claim and you no longer have the right to pursue the Injury Claim. Rather, the bankruptcy estate owns the claim and the bankruptcy trustee has the right to investigate the claim and pursue it. The bankruptcy trustee may demand payment from the person who caused your injury and, if the demand is not paid, the bankruptcy trustee may retain a personal injury attorney to file a lawsuit. If you are already working with a personal injury attorney, the bankruptcy trustee may continue to use your personal injury attorney or the trustee may hire a different attorney.
If the bankruptcy trustee decides to pursue the Injury Claim, then the bankruptcy trustee is in charge of the Injury Claim and any litigation. The bankruptcy trustee has the right to negotiate and approve a settlement, although any settlement must be approved by the bankruptcy judge. If the bankruptcy trustee eventually obtains a money judgment against or settlement from the person who injured you, the trustee will divide up that Injury Compensation to pay the personal injury attorney’s fee, any exempted amount of the Injury Claim to you, the bankruptcy trustee’s fees and expenses, and the remaining portion to your creditors who have filed claims in your bankruptcy case. If there is any Injury Compensation left over after paying all of those amounts in full, then the remaining Injury Compensation goes back to you.
The trustee may decide not to pursue the Injury Claim if the bankruptcy trustee believes that the Injury Claim is difficult to prove, expensive to pursue, or not likely to result in significant funds to distribute to your creditors. If so, the trustee will abandon the claim back to you. Once the Injury Claim has been abandoned, you are the owner of the Injury Claim again and you have the right to pursue the Injury Claim; if you eventually obtain money damages, those funds are yours to keep.
Pending Litigation and the Automatic Stay:
Another factor to keep in mind is the impact of your bankruptcy filing on any pending litigation related to your Injury Claim. If you are in the middle of litigation related to your Injury Claim and you file for bankruptcy protection, the bankruptcy automatic stay may postpone that litigation. The automatic stay does not necessarily affect your right to pursue your Injury Claim against the person or party who caused your injury, but it might affect any counterclaims that the other person or party is pursuing against you.
You Should Discuss your Injury Claim with a Qualified Attorney:
If you are considering filing for bankruptcy protection, or if you have already filed bankruptcy, it is important that you discuss any Injury Claim that you might have with your bankruptcy attorney. Your bankruptcy attorney will advise you about how to maximize your exemption protections in bankruptcy. In addition, depending on the size of your debts and your Injury Claim, your bankruptcy attorney might advise you use your Injury Compensation to pay down your debts and avoid bankruptcy altogether.
If you would like to discuss your personal injury claims and the impact of your bankruptcy filing with an experienced bankruptcy attorney, please feel free to contact us to schedule a consultation.