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When Personal Injury and Bankruptcy Collide
When a Debtor is Considering Bankruptcy and Maintains a Personal Injury Claim
When individuals file for bankruptcy, they are required to disclose all their assets and liabilities. However, some potential debtors are not aware that he or she is required to disclose potential lawsuits in which the debtor may obtain a monetary windfall. Specifically, if the debtor has a pending personal injury action, then the case must be disclosed. In fact, even if the personal injury complaint is not filed, but the debtor maintains a potential claim, then the asset must be disclosed on the bankruptcy petition. Failure to disclose your assets can constitute bankruptcy fraud.
Fortunately, monetary proceeds from a personal injury case may be exempt from the reach of creditors during bankruptcy proceedings. However, there are limits to how much a debtor can exempt. For example, if a debtor has a pending personal injury case but needs to file for Chapter 7 bankruptcy, federal statute provides for an exemption amount of $25,150.00. You also may be entitled to apply your wild card exemption to cover additional amounts recovered. As of the date of this article, the wildcard exemption is $12,575.00. 11 U.S.C. § 522(d)(5). As a result, an injured debtor may be able to keep $37,725.00 from a personal injury award or settlement. Only the net award should be considered, so that attorney fees and other costs incurred in recovering monies should not be considered part of the debtor’s recovery.
The current federal exemption bankruptcy statute that would primarily cover personal injury awards is 11 U.S.C. Section 522(d)(11), which provides:
(11) The debtor's right to receive, or property that is traceable to--
(A) an award under a crime victim's reparation law;
(B) a payment on account of the wrongful death of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;
(C) a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;
(D) a payment, not to exceed [$25,150.00], 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; or
(E) a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.
Debtors may also want to discuss whether the state or federal exemptions should be used to protect that award or settlement with their attorney. Keep in mind that a debtor’s given state may also provide for broader protection depending on the jurisdiction in which you reside. For example, in New Jersey a workers' compensation award is completely exempt in a Chapter 7 bankruptcy. Some other issues that must be considered in determining whether the money recovered is protected is whether the proceeds are from a workers' compensation award, a car accident case, or personal injury claims without losses that included pain and suffering. Furthermore, if the accident occurred after the bankruptcy was filed and the debtor filed for Chapter 7, then the proceeds may not be considered part of the bankruptcy estate and is therefore potentially protected in full. Since Chapter 13 bankruptcy proceedings takes post-bankruptcy filing activities into account, a post-filing injury must be disclosed to the court.
It's also imperative to discuss strategy with your attorney prior to filing for bankruptcy. In this scenario, should the potential debtor file for Chapter 7 or Chapter 13 bankruptcy? In a Chapter 7 proceeding, the Trustee may obtain any personal injury award above the exemption amount. As a result, the Chapter 7 Trustee generally retains a lump sum of the personal injury award or settlement. Conversely, in a Chapter 13 proceeding, the debtor must pay the non-exempt amount over the course of the bankruptcy plan, rather than provide a lump sum to the Chapter 13 Trustee.
When a Creditor Seeks to Sue a Debtor for Personal Injuries
If you are a creditor in a bankruptcy and need to sue the debtor for an injury caused by them, then you must first seek relief from the automatic stay. The automatic stay is designed to provide the bankruptcy estate with an opportunity “to resolve competing economic interests in an orderly and effective way, the automatic stay is designed to: (1) effectively stop all creditor collection efforts; (2) stop all harassment of a debtor seeking relief, and (3) maintain the status quo between the debtor and creditors.” In re Mu'min, 374 B.R. 149 (Bankr. E.D. Pa. 2007)(citation omitted).
“Under 362(d)(1), bankruptcy courts have routinely granted relief to permit personal injury plaintiffs to prosecute their claims in state court and to limit their collection efforts to the available insurance benefits.” In re Glunk, 342 B.R. 717, 740 (Bankr. E.D. Pa. 2006). “The rationale for granting relief from the automatic stay for this purpose is that the prejudice to the debtor, who may suffer modest or even no adverse financial consequences but may only have to expend some time and effort in cooperating with his insurer in the defense of the litigation, is outweighed by the prejudice to the creditor who ability to prosecute the action and reach the insurance benefits may be undermined by the aging of evidence, loss of witnesses, and crowed court docket” In re Glunk, 342 B.R. at 740; In re Todd Shipyards Corp., 92 B.R. 600, 603 (Bankr. D.N.J. 1988)(holding personal injury claimants were permitted to proceed with state lawsuit against the debtor. Stay relief was granted); In re Patriot Contracting Corp., 2006 WL 4457346, (Bankr. D.N.J. May 31, 2006). “[P]ersonal injury tort claims must be tried in a forum other than this [Bankruptcy] Court.” In re Todd Shipyards Corp., 92 B.R. at 604.
As such, if the creditor is solely seeking to obtain insurance proceeds from the debtor for a personal injury claim, then the bankruptcy court will generally provide stay relief. However, if a creditor is seeking to sue the debtor directly, then the creditor may need to explore different avenues.
If you have a personal injury claim and are considering filing for bankruptcy or if you are a creditor seeking to proceed against the insurance carrier of a debtor, please call our law firm for a free consultation.
NJ Attorney with extensive experience on Bankruptcy Law Real Property Law, Litigation, and Immigration Law. Dedicated Associate Attorney at Scura, Wigfield, Heyer, Stevens, & Cammarota LLP.
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