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Bankruptcy and Personal Injury Claims: What Happens When They Co-Exist?


This article is courtesy of Mr. Billy Patterson.

When you get injured in an accident, it can be financially draining and you may have to spend a fortune on your medical treatments. If an individual does not have the capability to work, then it can be difficult for him to manage his medical expenses. The claimant can file a case in the court and can receive compensation for the damages the person suffered, only if he/she wins the case. Unless the individual gets reasonable compensation for the damages, until then he or she has to bear the medical expenses. In this situation, when these people have limited assets to pay off the debt, they often incur financial obligation. The situation of these debt stricken consumers gets complicated when they continuously get collection calls and have to manage the compensation lawsuit. Therefore, they either file bankruptcy or consolidate debt in order to manage the rogue debt collectors.

However, many people may not be aware that filing bankruptcy can have a severe impact on any settlement they receive through a personal injury case. Therefore, you need to know the consequences when your personal injury case and bankruptcy petition co-exist.

What is a Bankruptcy Estate?

When you declare bankruptcy, a bankruptcy estate is created that is managed by the court appointed trustee. According to Title 11, Section 541 of the U.S. Code, the assets of the filer are included in the bankruptcy estate. Therefore, your future proceeds that you may receive from personal bankruptcy case can also be included in the bankruptcy estate.

Can you claim property as exempt?

Your future proceeds from an existing personal injury case as well as a portion of your property can be exempted from the bankruptcy estate.

According to the Rule 4003 of the Federal Rules of Bankruptcy Procedure, the filer can claim the personal injury proceeds as an exemption when he/she files petition with the bankruptcy court.

What is the effect when the defendant files for bankruptcy?

When a defendant in a personal injury case files for bankruptcy an automatic stay of the judicial proceeding in civil suit is in place. When you’re a defendant, you can manage to claim exemption from judgment against your assets or estate.

How can the Plaintiff overcome the stay?

The plaintiff has two options as he or she can file petition for relief from the stay and continue with the personal injury action. Otherwise, the claimant is required to wait until the defendant’s bankruptcy process is completed, and then move the personal injury suit to bankruptcy court.

What is the effect when a plaintiff files for bankruptcy?

When you are a plaintiff in a personal injury case, declaring bankruptcy can complicate your legal situation. Therefore, the court appointed trustee can garnish your future proceeds that you may receive from personal injury lawsuit.

The plaintiff is required to include the personal injury claim on a listed schedule of intangible property. However, if you do not list your personal injury claim on a bankruptcy schedule, then your bankruptcy petition can be rejected by the court.

When your personal injury case co-exists with a bankruptcy petition, the trustee appointed by the court technically becomes the client because the personal injury case is considered property of the bankruptcy estate. Therefore, if you file bankruptcy, it may deprive you of the right to make decisions about the personal injury settlement.

About 

I am a Dallas, Texas lawyer who has had the privilege of helping thousands of clients since 1971 in the areas of Personal Injury law, Social Security Disability, Elder Law, Medicaid Planning for Long Term Care, and VA Benefits.

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