Bankruptcy & Personal Injury Cases

Bankruptcy & Personal Injury Cases

Personal injury cases often lead to one party paying out and the other party getting paid. If either of those parties files for bankruptcy during or after the personal injury case, it can have a serious impact on the outcome. Whether you are the plaintiff or defendant, you will need to include the personal injury case in your bankruptcy petition. If you are the defendant, bankruptcy can possibly help you avoid paying. If you are the plaintiff, you may lose what you were awarded. What you do and how you approach it matters in bankruptcy when there is also a personal injury settlement or verdict to consider.  

At Villamor Law, we understand the complexities surrounding a personal injury claim and how it can impact a bankruptcy case. It's critical to know what your rights and responsibilities are so that you make smart decisions about bankruptcy. Call us at (888) 538-2111 or fill out our online contact form to schedule a consultation today to learn how we can assist you.

An Overview: Bankruptcy and Personal Injury Claims

When a person files a personal injury claim, it is because they have been injured in some capacity – it could be physical, emotional, or mental harm or harm to their reputation – and another party is at fault for it. Sometimes, the defendant in a personal injury case will file for bankruptcy. Other times, a plaintiff may file for bankruptcy. That bankruptcy petition can have a direct impact on the outcome of any personal injury lawsuit and vice versa. 

Bankrupt Defendants of a Personal Injury Claim

Typically, a personal injury claim is filed against an insurance company, but defendants can also include: 

  • Individuals
  • Sole proprietors
  • Partners of partnerships
  • Small businesses
  • Other types of corporations or organizations

Absent an insurer or when the insurance policy does not cover all the damages, the individual or company can be directly liable for any damages and are forced to pay out of their own pocket. For some, this may cause financial hardship, resulting in a bankruptcy petition. Individuals may file for Chapter 7 or Chapter 13 bankruptcy while business entities may file a Chapter 7 or Chapter 11 petition. The type of bankruptcy filed also makes a difference.

There is one caveat here. You want to avoid bankruptcy fraud if you are the defendant in a personal injury case and are filing for bankruptcy to avoid paying a settlement or jury award. Bankruptcy fraud is a federal offense and a conviction can result in steep fines and incarceration. If you are the plaintiff, you want to keep this in mind, too. Bankruptcy fraud is not an uncommon event.

Bankrupt Plaintiffs of a Personal Injury Claim

Likewise, plaintiffs of personal injury claims may file for bankruptcy at some point in their lives. If they have funds from a personal injury settlement or jury award, this can impact their bankruptcy case as well. The personal injury funds may be used to pay creditors during a bankruptcy.

But also, even if they have not yet filed the personal injury claim but know there is potential for one, this is considered an asset in terms of bankruptcy cases. The bankruptcy code, 11 USC § 101(5), defines a claim as a 

right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.

You will have to disclose the potential of a personal injury claim in a Chapter 7 or Chapter 13 bankruptcy filing. So again, when and what type of bankruptcy is filed matters for plaintiffs who need or want a fresh financial start.

What Happens When a Defendant of a Personal Injury Claim Files for Bankruptcy?

Bankruptcy can relieve a debtor of all legal responsibility to pay an injured party for compensable damages the debtor caused the injured party. It depends on many factors, but the two primary ones are:

  • When they filed for bankruptcy; and 
  • What type of bankruptcy was filed.  

Before a Personal Injury Case

If a defendant in a personal injury case believes he may be held liable, they may try to file for bankruptcy to avoid financial hardship or simply to avoid paying. Once bankruptcy is filed, an automatic stay is placed on the debtor's assets. A plaintiff in a personal injury case will not be able to file a claim against the debtor-defendant.

After a bankruptcy case concludes, the plaintiff may be able to file a claim, but it all depends on timing. If you are the injured party, statutes of limitations apply. The longer you have to wait to file a claim, the more likely the statute of limitations will run out. If the debtor-defendant filed a Chapter 7 bankruptcy, these cases are comparatively quick, but if the debtor-defendant filed a Chapter 13 bankruptcy, this type of case takes anywhere between three to five years to conclude. Statutes of limitations, which typically run between one to three years (but less or more depending on the type of personal injury claim and the jurisdiction) are up for most personal injury cases.

During a Personal Injury Case

If a defendant files for bankruptcy during a personal injury case, an automatic stay typically prevents a personal injury suit from proceeding. As soon as a debtor files for bankruptcy, the court issues an automatic stay. This court order prevents any civil lawsuits involving the debtor from proceeding, including personal injury cases. 

A plaintiff may be able to file a motion to lift an automatic stay in certain situations. Two specific situations involve the following.

  1. The plaintiff demonstrating the defendant filed for bankruptcy fraudulently (to prevent the personal injury case from proceeding); or 
  2. The plaintiff showing the damages sought are covered by the defendant's insurance. 

After a Personal Injury Case

If the debtor-defendant doesn't have insurance, or the insurance is insufficient, any damages awarded in a personal injury case become an unsecured debt in a Chapter 7 or Chapter 13 bankruptcy case filed after the personal injury case. 

For companies filing a Chapter 11 bankruptcy, depending on how the debt is restructured, they too may avoid paying their creditors, including plaintiffs who have settled or won a verdict against them.

In Chapter 7, 11, and 13 bankruptcies, the debtor can be relieved of any legal responsibility to pay personal injury damages. However, some circumstances exist that would exclude the personal injury damages from discharge.

Can Personal Injury Debt Be Excepted from Discharge?

When a defendant is bankrupt, their debts will typically be discharged so they are no longer liable for them. However, some types of debts can be excepted from discharge, including two relevant to personal injury cases:

  • Willful or malicious acts. When a personal injury case involves a defendant who was willful or malicious, the plaintiff can object to the discharge of debt related to the personal injury settlement or award. The bankruptcy court will decide whether or not to exclude the debt from discharge. 
  • Driving under the influence resulting in death or injury. Damages in a personal injury case involving a DUI resulting in death or injury cannot be discharged under Chapter 7, 11, or 13 bankruptcy proceedings. 

Also, when the plaintiff has already won the personal injury case and the defendant files for bankruptcy, the plaintiff can convince a court to lift the automatic stay in two additional situations: the court ordered either a constructive trust or an equitable lien. These remedies are less common but are a way to ensure the plaintiff is paid. 

Where a plaintiff in a personal injury case files for bankruptcy, different procedures apply. 

What Happens When a Plaintiff Files for Bankruptcy?

If a plaintiff in a personal injury case files for bankruptcy during a pending personal injury case, their personal injury case typically becomes part of the bankruptcy estate, where it is managed by the trustee. 

There can be exemptions to this at both a federal and state level. Chapter 7 bankruptcies in particular allow exemptions that could shield a personal injury award. It is essential to speak to a bankruptcy attorney if you're a plaintiff in a personal injury case and you are considering filing for bankruptcy.

Duty to Disclose Personal Injury Claims in Chapters 7 and 13 Bankruptcies

A personal injury case and associated damages are considered assets for the purposes of bankruptcies and must be disclosed. 

This includes bankruptcies under both Chapter 7 (involving the liquidation of an individual's assets to repay debts) and Chapter 13 (involving repayment plans for individuals and married couples). 

However, a plaintiff isn't required to disclose a personal injury case that arises as a result of an injury caused after they filed for Chapter 7 bankruptcy. 

Failure on the part of the plaintiff to disclose a personal injury settlement in their bankruptcy case can have serious consequences, including preventing the plaintiff from recovering damages they otherwise might have been entitled to or even criminal prosecution, in the event of intentional non-disclosure. 

Can Personal Injury Settlement or Award Money Be Exempted?

There are exemptions under both state and federal bankruptcy law that may allow a bankrupt plaintiff to keep a portion of their personal injury settlement. 

The availability of these exemptions, and their limits, vary depending on the situation. A bankruptcy lawyer can advise you on exactly what may be available to you in your circumstances. 

Contact Us Today 

Personal injury cases are designed to help the injured get compensated while bankruptcy is designed to give debtors some relief. The two sometimes collide, and when they do, you need to make sure you know your rights and how best to proceed in your unique circumstances. 

At Villamor Law, we will guide you through the process and represent your interests. Contact us today at (888) 538-2111 or fill out our online contact form to schedule a consultation.

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