How to protect your rights to injury compensation when filing bankruptcy

By Barbara Craig, Attorney at Law

Deciding to file bankruptcy can be a difficult decision for anyone. But when a person is unable to generate sufficient income due to an injury or other health problems – either their own or those of a loved one – filing bankruptcy may be the only way to get out from under ever-growing debt.

Often, people in these situations are dealing with the added complication of a pending or completed lawsuit (“injury claim case”) for a personal injury, worker compensation, wrongful death, or other claim in which they may potentially or have already obtained compensation from another person or company, whether it is the result of a judgment or settlement.

It is possible to eliminate consumer debt in bankruptcy and receive compensation from an injury claim case. But often, a portion of the compensation must be turned over to the bankruptcy trustee to pay back a portion of the debt included in the bankruptcy. Sometimes, the bankruptcy trustee can even take control of your injury claim case.

Injury claims that occurred before the bankruptcy filing

If the incident from which an injury claim arises occurred before the bankruptcy case was filed, the injury claim is part of the bankruptcy estate and must be listed as an asset on the bankruptcy petition. The assets of the estate, including any injury claims, no longer belong to the debtor.

bankruptcy injury claimsFailing to inform the bankruptcy court of such a claim (actual or potential) is an intentional omission of material fact on a bankruptcy petition. Such an omission can result in dismissal of the bankruptcy filing, and the debts will not be discharged. Because bankruptcy petitions are official court documents and are submitted under penalty of perjury, any statement included in a bankruptcy filing can be used against you in a court of law. Intentionally withholding information is bankruptcy fraud, which is a federal crime and can subject you to substantial fines and possible jail time.

This means that failing to include a known injury claim as part of the bankruptcy case may undermine your injury claim case. The person or company you are trying to collect money from in the injury claim case can use your bankruptcy petition against you. They can show the court that your bankruptcy petition is in essence, a legal representation that no claim exists. They can use this information to argue that you should be barred from taking an inconsistent position in any other legal action.

Injury claims that occurred after the bankruptcy filing

If the injury occurred after you filed bankruptcy, but you receive compensation while your bankruptcy is pending, this information must be disclosed to the trustee and your creditors; they may be entitled to some or all of the compensation received. This situation usually only happens during a chapter 13 bankruptcy, mainly because the bankruptcy case is open for a much longer period of time than a chapter 7 bankruptcy. When you receive injury claim compensation in a chapter 13 case, that compensation is considered part of your income. Because the payment plan is subject to the debtor’s income, the plan may have to be adjusted to reflect any compensation received.

Injury claim bankruptcy exemptions in California

The compensation received for some injury claims cases is exempt from bankruptcy under various California statutes. If the type of injury claim and the compensation received from it are exempt, some or all of the money would be protected against forfeiture to the bankruptcy trustee or any of the creditors, and would be retained by the debtor.

Exemptions in California bankruptcy cases can be complicated because there are two different sets of exemption provisions which can be utilized to protect the debtor. For this reason, it is very important to consult with an experienced bankruptcy attorney, who can analyze the facts of your case and determine the most advantageous way to file.

How to file bankruptcy and protect your injury claim case

How can you file bankruptcy and make sure you protect your rights in an injury claim case? Telling your bankruptcy attorney about the case is essential as the attorney will need to make sure it is correctly documented in your petition.

You should also make sure that your injury claims attorney receives a copy of the bankruptcy petition and is kept informed of the progress of your filing. Be sure to keep all of your documentation organized so if requested the paperwork can be submitted to the bankruptcy trustee in a timely manner.

There are many potential hurdles on the path to a successful bankruptcy filing. An injury claim case is a major one that needs to be discussed with an experienced bankruptcy attorney.

Do you have questions about filing for bankruptcy with a injury claims case, judgment, or settlement? Contact Bankruptcy Attorney Barbara Craig to schedule a free consultation. Serving clients in the South Bay area including Torrance, San Pedro, Lomita, Harbor City, Carson, Wilmington, Long Beach and other nearby communities.

Illustration courtesy Stuart Miles