Can I Protect My Personal Injury Award if I File for Bankruptcy?

A serious personal injury has the potential to cost you everything: your savings, your home, your kids’ college funds. A number of injury victims may end up declaring bankruptcy as a last-chance effort to keep a roof over their heads. If you decide to file for bankruptcy, though, it could affect how much of your injury award or settlement you’re allowed to keep.

Your rights in bankruptcy

There are two types of bankruptcies that people (called debtors, in legal context) can file – Chapter 7 and Chapter 13. In a Chapter 13, the debtor agrees to pay the future monthly bills as they become due and agrees to pay the arrears (the amount he/she is behind) over a three-to-five-year period. If debtors pay these amounts, then they don’t have to worry that they might lose their personal injury award. Often, the pain and injury award or settlement, is what helps the accident victim/debtor meet the terms of a Chapter 13 bankruptcy. Some debtors may even use part or all of the settlement or award to pay off their debts and get out of the Chapter 13 bankruptcy early; others may find that their award is exempt.

The second type of personal bankruptcy is the Chapter 7 bankruptcy, or liquidation bankruptcy. This bankruptcy is used by debtors who don’t have enough income to pay off their debts, or who don’t have major assets they want to save. Debtors list all their debts, assets, and income. The debtor is required to attend a creditor’s meeting. After the debtor meets the formalities of the Chapter 7, the debts are discharged, and he/she gets a fresh start.

Here are a few scenarios involving a personal injury award and bankruptcy filings:

• The settlement, or award, is paid before the debtor files for bankruptcy. If the debtor chooses to file a Chapter 7, the amount of the award will be reviewed by the bankruptcy court. If the debtor’s assets/income are too high, he/she may be required to shift to a Chapter 13 bankruptcy.
• If the personal injury victim/debtor qualifies for the Chapter 7 bankruptcy, then some or all of the award may be protected. The debtor can choose to use the federal bankruptcy exemptions or the Tennessee exemptions. The federal exemptions are higher than the Tennessee exemptions. The debtor must disclose the pain and suffering award in order for the exemptions to apply.

The federal exemption allows the accident victim to keep the following, regardless of how much debt is owed:

• • Any part of the award that is designated for “future earnings.”
  • Any part of the award that is designated for pain and suffering, or pecuniary loss, can be exempted up to $23,675. If the debtor and the spouse are both plaintiffs and both file the Chapter 7 bankruptcy, then the exemption doubles to $47, 350. Debtors can also use part of their “wildcard” exemption of $11,850 to protect their award.
  • The legal fees and costs are not considered part of the award or settlement.
• If the accident happens after you file, then the settlement/award is not part of the estate – the debtor can keep the personal injury money.

At the Rocky McElhaney Law Firm, our Nashville personal injury lawyers understand that many accident victims may face financial distress – especially if they are unable to earn a living. We work with our clients and with their bankruptcy lawyers to find the best solution. Sometimes debts can be negotiated if the creditors understand there is a strong possibility of a settlement. For help with all aspects of your accident claim, please call us at 615-425-2500 or complete our contact form to make an appointment. We have offices in Nashville, Hendersonville, and Knoxville.