If you have been injured in an accident while also accumulating debts, you may be wondering if filing for bankruptcy is an option at your disposal. This blog will explore how chapter 7 and 13 bankruptcy affect a personal injury litigation and its proceeds.
The Bankruptcy Exemptions and Personal Injury Litigation
Section 522 of the bankruptcy code provides for exemptions of certain property up to certain limits from trustee distribution during a bankruptcy proceeding. This means that a bankruptcy trustee cannot distribute any assets if they are valued at less than what your allowed exemptions are, since they are exempt from property of the bankruptcy estate. As it pertains to personal injury litigation, Section 522(d)(11)(D) of the Bankruptcy Code allows for an exemption for “[t]he debtor’s right to receive, or property that is traceable to—a payment, not to exceed $23,675, on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent.”
When evaluating this exemption, the calculation of the exempt amount is conducted after your personal injury attorney deducts his or her fees and costs from the recovery. In most cases, your personal injury attorney will charge a thirty-three percent contingency fee against any recovery. Therefore, your personal injury law suit would need to generate proceeds in excess of $35,000.00 to even implicate potential non-exempt equity in the personal injury litigation.
Further, you can apply your wildcard exemption under Section 522(d)(5) of the Bankruptcy Code to your personal injury litigation proceeds. The wildcard exemption consists of $11,850 of any unused exemption for a residence plus $1,250.00. Accordingly, a significant amount of your personal injury recovery will be exempt from distribution to your creditors in a bankruptcy proceeding.
The Implications of Chapter 7 Bankruptcy and Your Personal Injury Suit
Upon filing for chapter 7 bankruptcy, your personal injury litigation becomes an asset of your bankruptcy estate. Even if you have not filed a lawsuit at the time of your bankruptcy filing, the personal injury litigation is an asset of your bankruptcy estate as long as the incident causing the injury occurred prior to the bankruptcy filing. This means that control of the personal injury litigation or potential personal injury litigation will be transferred from you to your chapter 7 trustee (the individual appointed to administer your bankruptcy case). At that point, the chapter 7 trustee will determine whether to pursue the case on behalf of your creditors. Generally speaking, the trustee will only pursue the case if it appears that the case will yield a recovery above the amount you can exempt. However, the decision making in the personal injury case must go through the trustee until the trustee formally abandons his interest in the case.
The Implications of Chapter 13 Bankruptcy and Your Personal Injury Suit
In a chapter 13 bankruptcy proceeding, a trustee does not take control of your personal injury case like the trustee would in a chapter 7 case. However, any proceeds recovered above your allowed exemptions would need to be paid directly to the chapter 13 trustee. A chapter 13 debtor is forced to do this because there is a rule in bankruptcy that creditors must be treated as well in a chapter 13 as they would in a chapter 7 liquidation. Therefore, since creditors would receive the proceeds from your personal injury litigation that are in excess of your allowed exemptions in a chapter 7 bankruptcy proceeding, they also must receive these proceeds in a chapter 13 bankruptcy proceeding.
If you find yourself in this position, it is important to contact an experienced bankruptcy attorney to guide you through your options and help you assess your options in light of your personal injury litigation. If you have questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.
 Non-exempt equity means money above the allowed exemptions.