A Chapter 13 bankruptcy proceeding can ruin your personal injury claim if you are not careful to comply with your obligations under Federal law. Regardless of which comes first, if a personal injury case and a Chapter 13 bankruptcy proceeding are active simultaneously, then you must disclose the personal injury claim to the bankruptcy court. Failure to do so can result in:
- sanctions against you and your lawyers,
- removal of your personal injury lawyer and nullification of the attorney-client contract,
- your settlement being nullified,
- your settlement check being taken by the bankruptcy court, or;
- complete loss of the right to file a personal injury lawsuit and pursue the claim.
Thus, you should communicate with your personal injury lawyer and your bankruptcy lawyer about the effects before filing whichever claim comes second.
How Does Filing Chapter 13 Bankruptcy While a Personal Injury Case is Pending Affect My Personal Injury Lawsuit?
When you file for Chapter 13 bankruptcy during an ongoing personal injury lawsuit, the claim becomes an asset of the bankruptcy estate. As of the date you file for Chapter 13 bankruptcy, all of your assets cease to be yours. They now belong to the bankruptcy estate unless they fall under certain exemptions. A personal injury cause of action is an asset that does not meet any exemption requirements with the exception of the part owed for medical bills (as is discussed below). You can transfer or assign your personal injury claim away just like any other piece of property and thus, it is treated like any other piece of property you own in the bankruptcy proceedings. Additionally, your attorney-client contract on the personal injury claim is now void until approved by the bankruptcy court for your personal injury attorney to continue representation–which adds significant extra work on top of the case for your personal injury lawyer and may cost him some or all of his attorney fees if he must bring aboard a bankruptcy attorney.
What Happens When I Have a Personal Injury Claim Arise During An Ongoing Bankruptcy?
When a personal injury claim arises after the date of filing bankruptcy, any money you would have recovered to compensate you for losses above and beyond the money to pay for the medical expenses will be confiscated by the bankruptcy court and used to pay your bankruptcy debts. You must disclose the fact that an accident occurred and you have a pending right to bring a claim to the bankruptcy court. If you hire an attorney, he must be approved by the bankruptcy court. He will also have to give an accounting of the settlement at the end of the case. Your claim is an anticipated source of income that the bankruptcy court can use to satisfy debts.
What Can Happen if I Fail to Disclose a Personal Injury Cause of Action to a Bankruptcy Court?
When a person files for bankruptcy, they are required by Federal Law to disclose all assets. The disclosure may be amended and updated as the bankruptcy proceeds. However, failure to disclose a personal injury case can result in you losing all or part of the money recovered thereby or even completely losing the right to bring the claim. If your bankruptcy case is concluded and you then try to pursue a non-disclosed asset later, failure to disclose can be pleaded as an absolute bar to bring the claim under the doctrine of equitable estoppel—a legal principle stating that you cannot claim a legal right once you have taken a position in another court that you did not have said legal right.
Can A Chapter 13 Bankruptcy Court Take My Settlement Check?
Yes. If a Bankruptcy Court is concerned that you or your personal injury attorney are not going to honor your obligation to disburse the funds in a manner approved by the Bankruptcy Court, they can order the insurance company or your attorney to turn your settlement check over to the Court directly. Thus, it is very important that your attorneys disclose the case to the Bankruptcy Court and get approval before disbursing any funds to anyone, including themselves.
Isn’t There an Exemption for Personal Injury Recoveries In Chapter 13 Bankruptcy?
Yes. There is an exemption under the bankruptcy code for Chapter 13 that exempts personal injury recoveries except for compensation for pain and suffering and economic losses. However, on a practical matter, it is of little benefit to the debtor. This exemption allows your doctors to treat you without fear of getting paid but anything that you would recover in your pocket to compensate you above the outstanding medical bills, is taken by the bankruptcy court and used to pay off bankruptcy creditors.
Must I Disclose My Personal Injury Case to My Bankruptcy Court?
Yes. When you are in bankruptcy, you are required by law to disclose your personal injury case on the Schedule A/B Assets form. Your personal injury claim is an asset and all of your assets must be disclosed on this form.
What Happens If I Do Not Disclose My Personal Injury Case to the Bankruptcy Court?
Failure to disclose a personal injury lawsuit to a bankruptcy court may result in penalties and sanctions being imposed upon you and your lawyers in both the bankruptcy proceeding as well as in the pending personal injury lawsuit. Your personal injury lawsuit may also be barred.
Potential Bankruptcy Court Sanctions for Failure to Disclose
If you fail to disclose the personal injury claim as an asset, the bankruptcy court can take several actions including:
- Consider your exemptions waived.
- Confiscate all funds you recover and distribute them amongst debtors.
- Take over your personal injury action and turn it over to an attorney of their choosing.
- Sanction you, your attorney(s), or both with fines or jail time.
Potential Civil Court Dismissal of Your Case
When you file a Schedule A/B Property form in bankruptcy court, you must sign and swear to the court that it is a complete list of all of the assets you own. If you fail to disclose a personal injury lawsuit, you are representing to the court that it is not an asset. If you fail to disclose this asset and then file a lawsuit, you will have a serious problem if the other side checks your bankruptcy records (which are a matter of public record) and discovers it. Texas Courts have held that equity does not allow you to make a representation that the claim has no value to one court and then pursue it for value in another court. Thus, if you do not disclose the asset in bankruptcy, you are equitably estopped from bringing the claim in a civil court of law. This results in a dismissal of your case.
Anytime you have a bankruptcy case and a personal injury case, your attorney has no choice but to contact your bankruptcy attorney and determine whether the personal injury claim was disclosed. Sadly, not all bankruptcy lawyers are savvy enough to be aware of this need. Thus, an extra burden falls upon the Plaintiff’s attorney to be sure everything gets done right in the bankruptcy case. This can result in a substantial increase in the time and cost of bringing the claim for several reasons.
Must a Personal Injury Lawyer Obtain Bankruptcy Court Approval to Handle My Accident Case?
Nothing happens that affects a federal bankruptcy court case without the court’s approval. For a personal injury attorney to take your case, he must file a motion in bankruptcy court, give notice to all of the creditors so they have the opportunity to object, and then he must go before the bankruptcy court and get approval to act at the personal injury attorney for the Plaintiff. Once approval is granted he can move forward with the state court’s personal injury claim. However, the attorney is not done with the bankruptcy court yet. Once the case is settled or a judgment is rendered, the attorney must set up and hold another hearing in bankruptcy to get the court’s approval of the distribution of the funds recovered.
There is a substantial amount of time associated with the above procedures. Additionally, because many personal injury attorneys do not practice bankruptcy law and are not familiar with all of the traps and pitfalls, they will hire a bankruptcy lawyer to handle the bankruptcy matters. This can easily run $3,000 to $10,000—which inevitably comes out of the personal injury lawyer’s attorney’s fee.
Client Dissatisfaction
Another concern for personal injury attorneys when their client is in bankruptcy is that it is hard to make the client happy. At the end of the day, the bankruptcy court often takes away the money that would have gone to compensate the client for his pain, suffering, and lost income and uses that money to satisfy the debts of the bankruptcy estate. So, a reasonable settlement will result in an unhappy client in many cases.
Increased Costs and Risk
The above problems take away a client’s incentive to accept a reasonable settlement. It makes perfect sense for a client to gamble when he/she realizes that:
- If he goes to trial and hits a home run he might pay off everything and get something
- If he settles it all goes to the creditors and the rest of their debt is discharged in bankruptcy, and:
- If he goes to trial and loses, it was really the creditor’s money lost because bankruptcy will still discharge his debt to them.
As a result of the above, the plaintiff’s lawyer who is putting up the cost of going to trial may be forced to try the case and take an unnecessarily high risk of losing even when there is a reasonable settlement offer on the table.
Conclusion
A contingency fee attorney must weigh all potential risks and anticipated costs against potential rewards when deciding whether to take on a case. If the cost of bringing the claim is likely to eat up the recovery and/or other factors such as bankruptcy exist that are likely to make achieving a reasonable settlement unlikely, a personal injury attorney may not be able to take on the case. This is especially true when the firm does not handle bankruptcy claims on its own. A pending bankruptcy claim is something that can have a substantial increase in the cost of bringing a personal injury claim. If the case is a low-value claim that is not likely to net sufficient funds to cover the costs and/or provide compensation to the client, it may simply not make financial sense for the attorney to take on the personal injury claim.