Declaring Bankruptcy While Your Personal Injury Claim is Pending

Accidents can be financially devastating to a victim and their family. Accidents often come out of nowhere and can throw a victim’s finances into despair almost immediately.

Victims who are unable to work may lose wages and additional earning capacity. For example, a victim who sat at a desk all day may have trouble sitting with back pain. While they may still be able to work as they get better, permanent injuries could require a change in job resulting in a loss of wages.

Victims may also incur significant medical expenses. Even victims with health insurance may have co-payments, co-insurance or high deductibles.

Property damage could also cause additional financial stress on a victim without adequate insurance to cover deductibles or damage to their vehicle or other property.

Too often, victims seek advice from a bankruptcy attorney to try and wipe away their financial burden after an accident. This may allow the victim to start fresh, albeit with a new earning or work ability perhaps. If not carefully thought out, however, that decision could put the victim in a far worse position than if they just waited until their personal injury case resolved.

What Rights Would I Typically Have After an Accident?

If an accident is not the fault of the victim, many states permit the victim to recover certain damages (i.e. Money) from the at-fault party, what we call in legal terms the “tortfeasor”. Some damages a victim may recover could include past lost wages, loss in future earning capacity or ability, past medical expenses, future medical expenses, past out of pocket expenses, future out of pocket expenses, rental car reimbursement, property damage reimbursement, past pain and suffering, and future pain and suffering, among other possible damages. There are often time limits invoked by what we call a Statute of Limitation, which is a law that tells how long a victim has to file a lawsuit. They can often make a claim at any time within that period, but must file a lawsuit by a certain date if the parties cannot reach an agreement.

I Want to Clear my Debts and Start Over. Should I File for Bankruptcy?

Filing for bankruptcy while you have a personal injury case still pending could ruin your case. Bankruptcy may be an excellent option for a victim to get rid of their debts and start fresh. However, bankruptcy law essentially makes you give up your case.

So how does Bankruptcy Impact my Personal Injury Case?

Bankruptcy laws are governed by Federal laws that dictate who has what rights. When you file for bankruptcy, you generally are required to disclose all assets and debts. Your personal injury case, even if not settled yet, is an asset with an unknown value. The value may increase or decrease over time depending on your medical bills, medical treatment, and how your body heals (remember you may be entitled to future pain and suffering).

After filing for bankruptcy, the law often imposes an automatic stay on your personal injury case. It basically freezes your assets, including the asset being your possible personal injury settlement. At that point, you may be giving up your case and transferring it to a bankruptcy trustee. A trustee is typically appointed by the bankruptcy court to figure out your debts and collect all assets they can to try and pay down your debts.

Once the trustee is appointed, the trustee will often discuss your case with your personal injury attorney if you have one. The trustee should decide if he or she wishes to continue pursuing the personal injury case in order to recover money to add to the asset pool. If the trustee decides to pursue the case, the trustee enters into a contractual agreement with the personal injury lawyer and essentially retains your lawyer. You, while still the victim, may no longer be the client because you no longer have any rights to the money. You may still have to cooperate in order to help the trustee collect money for your bankruptcy estate. The trustee will also generally file a motion with the bankruptcy court to get permission to retain the personal injury attorney.

At that point, the personal injury case generally continues as usual, except the trustee is the one hoping for any settlement money. If and when a settlement is proposed, the trustee then has the authority to accept the settlement and sign any releases or settlement documents.

Once settled, the personal injury attorney often works with the trustee to determine what medical bills must get paid from the settlement and what can be discharged in bankruptcy. Some bills may actually attach to the settlement and need to get paid from the settlement, like those with liens filed against the case. Others may get wiped away in bankruptcy if proper claim forms are not filed by the medical providers.

Once all bills and balances are figured out, the bankruptcy trustee generally signs a closing statement authorizing distribution pursuant to the closing statement, and possibly a release. The victim may also need to sign the closing statement and/or release. At that point, the trustee generally then files a motion with the bankruptcy court to approve the settlement and distribution. Once approved by the court, the money can be disbursed.

If there is money left over from the settlement after paying the trustee, your attorney, and medical expenses, you still don’t necessarily get that money. Any “leftover money” gets put into the bankruptcy asset pool to help pay any other unrelated debts you may have.

If, after paying the unrelated debts and the bankruptcy trustee and attorney, there is any money left over, you may get some money back.

What Should I do if I Want to File for Bankruptcy While I Have a Pending Personal Injury Case?

Wait. Yes, if at all possible, wait. What if you got a big settlement and your attorney was able to negotiate your bills down and still get you money to help pay your other debts? You could avoid bankruptcy completely, or at least give you a fighting chance to get your debts under control.

If you are considering filing for bankruptcy while you have a personal injury case pending, ask your personal injury attorney what to do. Consider your options before you may completely give up your rights to any settlement.

* Nothing in this article is intended as legal advice. Every case is unique. You should consult with your attorney before relying on any information to see what works best for your own particular situation. Information herein is for general information only. Individual state laws and federal laws constantly change. Make sure to check the current laws to determine what is most appropriate for your particular case.