No one wants to be injured and broke, but it can happen to anyone. Of U.S. debtors surveyed between 2013 and 2016, 66.5% reported that medical expenses contributed to their bankruptcy, with an estimated 530,000 people filing for medical bankruptcy each year. Only an experienced attorney can give you bankruptcy advice or truly defend your interests against a large insurance company in an injury lawsuit. Whether your injury occurred in an auto accident, slip and fall, or dog bite, Gladstein Law Firm, PLLC can help you win and keep control of your settlement. No matter the size of your injury, our lawyers can help you protect your injury settlement from bankruptcy.
What Happens in Bankruptcy?
Whether you’ve already filed for bankruptcy or see doing so in your future, you need to know some important terms: income, assets, and the way you will pay your debts. You’ll also need to know about the bankruptcy trustee and what the bankruptcy court does.
First, the bankruptcy court decides the issue anytime there is a dispute. Second, the U.S. trustee manages your debts and the creditors’ interests. Finally, the chapter bankruptcy you file will determine the rules for whether creditors can access your injury settlement.
When you file for Chapter 7 bankruptcy—the most common type for individuals—the trustee will collect your assets. Assets include cash, property, or anything of value that you have access to. The assets then become an estate, which the trustee distributes to your creditors. In a Chapter 13 bankruptcy, you make a plan to pay back your debts gradually. After paying on the plan for the period (usually three to five years), the remaining debts are forgiven.
Can Debt Collectors Take Settlement Money?
When you file for bankruptcy, your debts are generally automatically frozen. Debt collectors cannot collect any money from you during that time. Instead, your debts and creditors go to bankruptcy court, and the bankruptcy laws determine what happens to your settlement.
Then, the answer to whether your creditors can take your settlement in bankruptcy depends on when you file for your bankruptcy petition relative to receiving your injury settlement. If you’ve already filed for bankruptcy when you receive your settlement, the creditors’ rights depend on which chapter you file.
In Chapter 7, the trustee forms the bankruptcy estate when you file your bankruptcy. If you have the injury payments in your bank account, the trustee will seize them. When you file bankruptcy and have a pending lawsuit, the trustee will include the expected value of your settlement and add the payment to the Chapter 7 estate when you receive it. After you’ve gone through a Chapter 7 liquidation, your settlement amount is not the property of the estate and will be yours to keep.
In Chapter 13, the trustee can seize any money you receive unless you use it for necessary expenses as outlined in your plan. An injury settlement is usually considered excess income unless you have an exemption (see next section). If you have a pending lawsuit when you file Chapter 13, the trustee will investigate the expected value of your settlement. Then, the bankruptcy court will account for it when approving your bankruptcy plan payments.
What If I’ve Already Spent the Settlement Money When I File for Bankruptcy?
If you used your injury settlement to pay for ordinary expenses over time, like for living expenses, it’s unlikely the bankruptcy trustee will be able to trace the funds. However, if you used the money to pay off creditors within a period before filing, the bankruptcy trustee can “claw back” the money. Transfers made to family members might even be suspicious. Any appearance of preferential or fraudulent transfers can be problematic in bankruptcy.
Are Personal Injury Settlements Exempt From Bankruptcy?
When you file for bankruptcy, you can request that the trustee exempt certain assets from the estate. Exemptions allow you to keep the property that you need to live. Usually, exemptions cover your house, ordinary household goods, or car (every case is different) and vary by state. Kentucky allows federal bankruptcy exemptions. Federal bankruptcy law includes two significant exemptions in a personal injury claim: the personal injury exemption and the wildcard exemption.
The Personal Injury Exemption: 11 U.S.C. § 522(d)(11)(D)
Under section 522(d)(11)(D), you can keep a portion of your injury settlement up to the named amount. In 2022, a debtor can exempt the first $27,900 of a personal injury settlement award. Unfortunately, the law does not allow you to include an award for pain and suffering in the personal injury exemption. If you receive damages for a loss of future earnings, you can keep any amount deemed reasonably necessary (see section 522(d)(11)(E)).
The Wildcard Exemption: 11 U.S.C. § 522(d)(5)
The wildcard exemption allows you to exempt any property you want up to a specific amount. You can stack wildcard exemptions with other exemptions, so you can use the wildcard to protect more of your settlement award. Starting April 1, 2022, the wildcard exemption allows a debtor to keep up to $1,475 in the property plus up to $13,950 of any remaining homestead equity.
Gladstein Law Firm, PLLC: Helping You Get Back on Your Feet
Filing for bankruptcy isn’t always a bad thing. Bankruptcy allows you a legal pathway to a fresh start. Many people who have been wrongly injured end up with mountains of medical debt after an accident. It can be overwhelming to face alone, especially if you are seriously injured and can’t work. The good news is that Gladstein Law Firm, PLLC understands how to protect your injury settlement from bankruptcy. If you’re facing tough negotiations with creditors and struggling to pay your debts, we can help.
Seth Gladstein has a thorough, first-hand understanding of the tricks and strategies used by large organizations. We can guide you through even the most complex personal injury claims and help you protect your assets. Contact us now.
