Often, people who have debt problems are very unlucky. Sometimes, they can be very, very unlucky. Sometimes, prior to filing a bankruptcy case, a debtor will sustain some sort of injury that is not their fault. Often times, these debtors have the right to sue to recover damages on those claims. So what happens to those claims when a debtor files a bankruptcy?
Whenever you file a bankruptcy, any asset you have becomes a part of your bankruptcy estate. An “asset” can be anything of value, from your house to your socks. A personal injury claim, where you could potentially recover money, is certainly an asset of your bankruptcy estate.
So how would this work? Let’s pretend that John is in a car accident. He was rear-ended in a car collision. John survived the accident, but was injured. John goes to the hospital and receives treatment. At the time of the accident, John was in the process of filing for bankruptcy. Without settling the claim, John goes ahead and decides to file a Chapter 7 bankruptcy.
John would be required to list his potential claim against the other driver as part of his bankruptcy estate; if he does not list it as part of his estate it would cause several issues. First off, it would be perjury. Second of all, it would prevent him from making the claim in the future. If he did decide to sue the driver at a later time, the driver could dig up John’s bankruptcy records and see that he never listed the claim. A court would probably prevent John from making his claim because of that.
So let’s assume John does the smart thing and lists the personal injury claim. So what happens next? The first thing John would have to do is assign a value to the claim. He can do this by consulting with a personal injury attorney. Whether John would be able to keep the proceeds of any personal injury claim would depend greatly on the value of the claim. In some states there are personal injury protection statutes that make proceeds from lawsuits exempt—which is not the case here in Texas. So the real question is whether you can exempt the proceeds of the lawsuit under the Federal “Wild Card” exemption. Whether you would be able to do this would depend on many factors, including the equity in your home and in your vehicles.
So what would happen if John is unable to protect the personal injury claim? The Chapter 7 Trustee would step into John’s shoes and have the right to pursue the personal injury claim against the driver for John’s damages. The Trustee would then turn around and use that money to pay off a portion of John’s creditors.
If you are considering bankruptcy, or have a personal injury claim, contact the attorneys at Fears Nachawati who can guide you through these important issues. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com for more information and a free consultation.