Personal Injury Claims and Bankruptcy

Today we are privileged to have a friend of mine, Jared Richards, present a post about injury claims in bankruptcy.  Jared is a personal injury and bankruptcy attorney in Henderson, Nevada.  Thanks for the post, Jared!  – Ryan Anderson

As an attorney who works in both the personal injury and bankruptcy arenas, I often hear the following question: “What happens to my personal injury claim in bankruptcy?”  If you are ever in the situation where you are asking this question, you need to get professional advice.  Call an attorney who can walk you through it, because your specific set of facts might have a twist that I don’t account for here.  This article gets a bit technical at times because these concepts are technical.

personal injury bankruptcy Let me start by explaining a couple of basic concepts of bankruptcy and personal injury claims.

The Basics of Chapter 7

The following explanations are overly simplistic, but they get to the heart of the matter. In a Chapter 7 bankruptcy, you agree to surrender all of your unprotected assets (or non-exempt assets, if we are being technical) to the bankruptcy trustee.  In exchange, the court wipes away all of your unprotected debt. (Or, if you are into technicalities, the court enters a discharge order forbidding collection activity on your dischargeable debt.)

So what are protected, or exempt, assets?  The federal bankruptcy law allows each state to create its own list of exemptions.  I practice in Nevada, so I am most familiar with Nevada’s exemptions.  In Nevada, NRS 21.090 allows you to protect $15,000.00 in equity in one vehicle per person filing bankruptcy.  It allows each person to protect $12,500.00 of household goods and furnishings.  And, importantly for our topic, it protects up to $16,500.00 in a claim for a personal injury.  These numbers are correct as of December 2013.

So, for our analysis, the debtor has to surrender any assets unless that asset is protected.  Thus, the debtor has to surrender any part of the net personal injury claim in excess of $16,500.00.

What Part of the Personal Injury Claim Is Exposed and/or Protected?

The next part of the analysis is what portion of the personal injury settlement is subject to the bankruptcy estate and thus needs to be protected by an exemption.  When you file for bankruptcy, the law automatically creates something called the “bankruptcy estate”.  The bankruptcy estate consists of all of the debtor’s assets that are not exempt.  The bankruptcy estate, at the end of the bankruptcy, is distributed to creditors.  But, the bankruptcy estate only has the right to the non-exempt assets that the debtor has the right to.

In the case of a personal injury claim, the injured victim will only receive a portion of the settlement to put in his or her pocket.  The rest goes to pay doctors, attorneys and other expenses.  It is not unusual in a $60,000.00 settlement for the attorney to get one third, or $20,000.00, for collecting the money.  That would leave $40,000.00 for the injured party to pay medical and other expenses.  If medical expenses are $25,000.00, that would leave the injured party with $15,000.00.  Under that scenario, the debtor/injured party could use the $16,500.00 injury exemption to protect the entire claim.

* As a note for attorneys, medical and other liens come into play here.  If medical providers don’t have liens, they would be considered unsecured creditors and should be treated like any other unsecured creditor listed in Schedule F in a bankruptcy.  Those who do have liens probably should be listed on Schedule D of the bankruptcy.

The Personal Injury Claim During and After the Bankruptcy

This section is more of a guide for actual personal injury attorneys and gets a bit technical.

Bankruptcy is a very complex area of law, and this small article certainly does not address all of the nuances.  But I will give some pointers to look at.  In bankruptcy, the debtor is obligated to list all of his/her assets on Schedules A and B.  The debtor MUST list the personal injury claim on Schedule B.  Failing to do so may be construed as bankruptcy fraud, which is a federal felony.  In my opinion, it is sufficient on Schedule B to list the basic nature of the claim, such as “personal injury claim” and list the name and address of the law firm handling the claim.  If the claim isn’t yet settled, you would need to list the value as “unknown”.  It is my opinion that this is enough to give the trustee notice of the assets.  Presumably, the trustee will inquire about the injury claim at the 341 meeting.

After the 341 meeting, the trustee will do one of two things.  The trustee might declare the bankruptcy an “asset” case and instruct the debtor and the personal injury attorney that the bankruptcy estate has a claim to the personal injury settlement.  If the trustee does this, the debtor and injury attorney have to honor the bankruptcy estate’s claim.  The personal injury attorney also should call the trustee to touch base with him/her.

Alternatively, the trustee might declare this a “no asset” case by filing a “Report of No Distribution”.  If the trustee does this, the trustee is stating the intention to abandon any asset of the bankruptcy estate, if any such asset exists.  Once the court enters the final order of discharge and enters the order closing the case, the court ratifies the trustee’s intention to abandon all assets.  For support for this premise, please see 11 U.S.C.A. § 554 and In re Reed, 940 F.2d 1317, 1321 (9th Cir. 1991).

For our purposes, if the personal injury claim was properly disclosed on Schedule B and if the trustee files a Report of No Distribution, the bankruptcy estate abandons its rights to the personal injury claim when the court enters the order closing the case.  To be safe, if the settlement happens within 180 days of the bankruptcy being filed, I would definitely get a bankruptcy attorney involved to analyze the case.

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