Short answer, yes.  A bankruptcy trustee can take your personal injury settlement or judgment award proceeds.  Suffering a personal injury is difficult enough.  But, the injury itself can also interfere with your ability to work and cause medical bills that you can not afford.  The added problem of economic hardship often leads to the consideration of bankruptcy to resolve insurmountable financial stress.  Before you file, you should know how your injury claim will be affected by your bankruptcy.

 

Unfortunately, your personal injury claim is considered as asset for purposes of bankruptcy.  Even if you don’t plan to pursue a claim until after your bankruptcy discharge, you are required to disclose the fact that you were in a motor vehicle accident.  Failure to do so could constitute fraud which could undo your bankruptcy discharge, result in loss of any damages received and, worse, result in criminal charges.  Accordingly, you are required to report both potential claims and lawsuits and pending claims and lawsuits existing at the time you file for bankruptcy.  

 

The Personal Injury Claim.  The Bankruptcy Code 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.”  The typical parts of personal injury damages include actual damages for medical bills and related expenses, lost wages, pain and suffering, punitive damages, costs and attorney’s fees.  11 U.S.C. § 101(5). 

 

 

Chapter 7.  If you file for a Chapter 7, your claim or lawsuit becomes part of the bankruptcy estate.  The bankruptcy trustee will become involved in the pursuit and negotiation of your lawsuit.  The bankruptcy trustee steps into the debtor’s shoes with regard to the claim or lawsuit and must approve which personal injury attorney is retained or hired. If you already have an attorney, the trustee will work with your attorney.  If you have not hired an attorney yet, the trustee may do so in order to facilitate collection of damages.  The bankruptcy trustee must also approve any settlement as well as the amount of fees to which the personal injury attorney would be entitled.  The attorney is required to submit a formal “final fee allowance” application to the bankruptcy court which application must specify the attorney time expended, the services rendered, the expenses incurred and the amount sought.  The attorney’s fees and costs must be determined to be “reasonable and necessary” by the court.

 

If a claim has been submitted or a lawsuit is filed on your behalf, you will not receive a discharge until the claim or lawsuit has been resolved and any settlement or verdict for damages in your favor has been distributed.  Once a judgment or settlement amount is received, the bankruptcy trustee will pay out the proceeds in the following order:

 

1.  Administrative Fees and Costs.  The trustee’s fees are paid first.  Attorney’s fees and costs are considered administrative and paid next in order.

 

 2.  Liens.  Any medical provider liens and subrogation claims for medical bills already paid.

 

 3.  Exemptions.  You as the debtor are paid in an amount equal to your exemptions applied to the proceeds.  You must have lived in Florida for 2 years prior to filing in order to apply the Florida exemptions which are as follows:

 

A.  $1,000 personal property exemption if you have also claimed a Homestead exemption or           $4,000 personal property exemption if you have not also claimed a Homestead

     exemption;  (F.S. § 222.25(4)).

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B.  The amount paid for any professionally prescribed health aids such as crutches, a walker, a       wheelchair or hospital bed rental. (F.S. § 222.25(2)).

 

C. Compensated lost wages if you are considered head of household by providing more than        one-half of the support for a child or other dependent.  (F.S. § 222.11). 

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D.  $10,000 to the extent there are $10,000 in medical bills and you are not also claiming a             Homestead exemption (F.S. § 222.26(2)).

 

E. $10,000 equity in a motor vehicle may be applied when filing to the extent that there are            $10,000 of medical bills but it is not an amount that will be repaid from the proceeds.

    (F.S. § 222.26(1)).

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If you claim both the exemption in C. and D. above,

the medical bills must equal the combined total.

 

F.  All Settlement of Judgment Proceeds if you were injured in a hazardous occupation (i.e. railroading, operating street railways, generating and/or selling electricity, telephone and telegraph business, express business, dynamiting and blasting, propelled boating, and operating a motor vehicle for public use). (F.S. § 769.05).

 

4.  Payments to your creditors.  If the claim holds little value or not much will be left over after payment of necessary expenses or application of exemptions, it is possible that the bankruptcy trustee could abandon the claim.

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5.  Resolving Your Personal Injury Claim Before Filing for Bankruptcy.  Even if you settle your personal injury claim or receive payment as the result of a verdict within 90 days before you file for Chapter 7 Bankruptcy, the bankruptcy trustee may determine that money belongs to the bankruptcy estate.  This is called a “look back” period and applies for up to 1 year for any money given to friends, family members or business associates.  11 U.S.C. § 547.  The look back period for any fraudulent transfers in Florida is up to 4 years; these type of transfers would include transfers of money or assets with the intent to hide the money or assets from the bankruptcy or or constructive fraud where, for example,  you sell a valuable item for far less than its value to a family member or friend 11 U.S.C. § 544, 11 U.S.C. § 548, F.S. § 726.105 and F.S. § 726.106.

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The bankruptcy trustee may use his or her “clawback” powers to take the money back from people or entities that you paid.The bankruptcy trustee could even ask that you pay an amount equal to the unexempt damages into the bankruptcy estate before you receive your Chapter 7 discharge.If a bankruptcy takes legal action to affect a claw back, the action could significantly delay the entry of your discharge.

 

Chapter 13.  A bankruptcy trustee will not take over your personal injury claim or lawsuit in a Chapter 13 bankruptcy.  However, the trustee will monitor the progress of your case and must approve any settlement.  Additionally, your attorney fee agreement will require bankruptcy court approval.  Although you will be able to keep the non-exempt portion of your settlement or judgment award, the amount you receive could affect the monthly amount you are required to pay into the approved plan.

 

Post Filing Personal Injury.  If you are injured after you have filed a Chapter 7 bankruptcy, your claim or lawsuit is generally protected from the bankruptcy.  However, if you have filed a Chapter 13, you will be required to report the potential or pending claim to the bankruptcy trustee and any proceeds will be considered income.  The trustee then may seek to modify the plan to include proceeds from your claim or lawsuit for payment in the plan.