Personal injury claims are exempt in Chapter 7 and Chapter 13 bankruptcy up to a point. Unfortunately, such claims are sometimes lost entirely because the debtor failed to disclose the claim or did not know how to protect it. It is bad enough to be injured in an accident, but to lose your claim for compensation can be devastating. Fortunately, there are steps you can take to preserve your claim in bankruptcy.
Disclose, Disclose, Disclose
All personal injury claims arising are assets just like your car, furniture, and other items of personal property and must be disclosed in your schedules. Failing to disclose an injury sustained before filing may lead to the loss of any recovery to which you might be entitled. Even if the failure to disclose is unintentional, it may not save your claim. Instead of compensating you for your injury, the funds will be distributed among your creditors. Moreover, intentionally failing to list an asset can leave you open to criminal liability.
Ironically, many claims lost for failure to disclose would have been exempt, had the debtors listed them. By attempting to protect the claim by not disclosing it, the debtors in such cases often lose out. (The courts have taken a hard line of late on undisclosed assets, even in cases where the entire claim would have been exempt had it been reported.)
Some debtors believe that they do not have to disclose an injury or potential claim, as long as they do not file suit until after bankruptcy case has closed. They are wrong. If the injury happened or claim arose before the debtor filed for bankruptcy, the debtor must disclose it to the trustee. Trustees regularly check court records after the bankruptcy case closes to see if bankruptcy filers have filed a personal injury case based on a pre-filing injury. In fact, I have spoken to trustees who have located and seized personal injury awards several years after the bankruptcy case was closed.
If an injury happens after you file for Chapter 7 bankruptcy, it is not part of the bankruptcy estate. You can keep it.
In a Chapter 13 case, any award for an injury that occurs during your bankruptcy is an asset. If the award is for more than your exemption amount, you may have to increase payments to the creditors. However, unlike Chapter 7, you can dismiss a Chapter 13 at any time if you do not like the result.
Exempting a Personal Injury Claim
There are exemptions that can protect all or part of the proceeds of a damages award or a settlement. Under the personal injury exemption of bankruptcy code, you can keep up to $22,975 from a personal injury award or settlement, not including pain and suffering or compensation for monetary losses. 11 U.S.C. 522(d)(11)(D). This number may double to $45,950.00 for a couple filing together if both spouses are plaintiffs. (As a Pennsylvania bankruptcy lawyer, I generally advise my clients to use the federal exemptions, which are larger than our state exemptions.)
Although this exemption is limited and does not exempt compensation for pain and suffering and actual pecuniary (monetary or actual losses), there are often other ways to protect your claim.
In addition to the personal injury exemption, if your claim is over the amount allowed by the personal injury exception, you can apply the federal “wild card” exemption, which will allow you to exempt more. The wild card exemption includes a basic exemption of $1225 plus up to $11,500 of any unused homestead exemption. Thus, if you do not use all of your homestead exemption, the potential total wildcard exemption is $12,725, which you can apply to any personal property, including a personal injury claim or award. The wild card exemption can be used in addition to other exemptions. For example, by “stacking” the personal injury exemption of $22,975, the wild card of $1225, and the unused homestead exemption of $11,500, you have a total exemption of $35,700.
Although they do not apply in all cases, some additional exemptions may be available. For example:
Crime Restitution. If the injury resulted from a crime, any award from a crime victim reparation fund is exempt. 11 U.S.C. 522(d)(11)(A)
Wrongful Death. Payments for wrongful death of someone upon whom the debtor was a dependent are exempt “to the extent reasonably necessary” to support the debtor and the debtor’s dependents. 11 U.S.C. 522(d)(B)
Life Insurance Benefits. Life Insurance benefits are exempt if the debtor was a dependent of the insured and the funds are reasonably necessary to support the debtor and the dependents of the debtor.11 U.S.C. 522(d)(C)
Loss of Future Earnings. If the payment is for loss of future earnings of the debtor or someone on whom the debtor was a dependent, the award is exempt provided that the payment is reasonably necessary to support the debtor and the debtor’s dependents. 11 U.S.C. 522(d)(11)(E)
Quick Note: In Pennsylvania, a child’s claim is not the property of the parent in most cases and is, therefore, not part of the bankruptcy estate (although you should note it in the Statement of Financial Affairs). In cases involving an injured child, the language of the settlement is particularly important.
Don’t lose your right to compensation for an accident. If you have been injured in a car accident or other incident, it is critically important to (1) tell your bankruptcy lawyer about any potential claim you may have, and (2) tell your personal injury lawyer that you are considering filing for bankruptcy. As you can see from the above, how an award or settlement agreement characterizes the damages can impact whether the funds are exempt. Your attorneys can work together to reach the best possible outcome for you.