How Does Chapter 13 Bankruptcy Affect My Personal Injury Case?

Chapter 13 Bankruptcy and Personal Injury Claims

One of the questions we always ask when interviewing a potential client is whether they have recently filed for bankruptcy. The reason for this is that when a personal injury plaintiff is in bankruptcy it can have a drastic effect upon a personal injury claim.

Date of the Personal Injury Claim vs Filing Bankruptcy

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. You can transfer or assign it away just like any other piece of property. Thus, if your personal injury cause of action accrues prior to the date of filing bankruptcy, it is no longer yours. That asset belongs to the bankruptcy estate.

Failure to Disclose a Personal Injury Cause of Action

Chapter 13 bankruptcyWhen 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 plead 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.

Cause of Action Accrues After the Date Bankruptcy Began

Even when the personal injury claim accrues after the date of filing bankruptcy, you still must disclose this as an asset in an existing bankruptcy case. The reason for this is that it is an anticipated source of income which the bankruptcy court can use to satisfy debts.  Now, there is an exemption under the bankruptcy code for Chapter 13 that exempts personal injury recoveries except for funds pertaining to pain and suffering and economic losses.  However, it has been our experience that this limited exemption does you little good since the exempt part goes towards paying off medical expenses. Furthermore, if you fail to disclose the claim, the bankruptcy court can take several actions including:

  • Consider your exemptions waived.
  • Confiscate all funds you recover and distribute it amongst debtors.
  • Take over your personal injury action and turn it over to an attorney of their own choosing.
  • Sanction you, your attorney(s) or both.

The Additional Time and Expense of Bankruptcy

Anytime you have a bankruptcy case and a personal injury case, your personal injury lawyer 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.

Obtaining Bankruptcy Court Approval

Nothing happens in Federal Bankruptcy Court 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 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 personal injury claim. However, the attorney is not done with 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 may 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 attorneys 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 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:

  1. If he goes to trial and hits a homerun he might pay off everything and get something
  2. If he settles it all goes to the creditors and the rest of their debt is discharged in bankruptcy, and:
  3. If he goes to trial and loses, it was really the creditors 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 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 is does not handle bankruptcy claims on their own. A pending bankruptcy claim is something that can have a substantial increase in the cost of bring 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.