Yes, you can usually keep a personal injury award to the extent it is protected by exemptions, either federal exemptions or your state’s exemptions.
Written by Attorney Andrea Wimmer.
Updated December 28, 2020
If you have the right to file a lawsuit against someone, that right (called a “cause of action”) is considered an asset. That is true even though there may not be any guarantees that you will win the lawsuit or receive funds from the other party if you do win. In other words, it may not be worth much at the time your bankruptcy is filed, but it's still an asset. Just like that 20 year old treadmill in your garage is an asset.
This means that you will have to disclose (list) your lawsuit (or your cause of action if no lawsuit has been filed yet) on your Schedule A/B, specifically in response to question 33. Additionally, the lawsuit has to be listed in response to question 9 on your Statement of Financial Affairs.
Now, if you already won or settled your lawsuit, and have received money from it, that's a different question altogether. In that case, the funds themselves are the asset, and whether you keep them will depend on what form they are in (e.g. money in your bank account, the right to receive the money via an annuity, etc.), and whether an exemption is available to protect that.
Why it is important for you to disclose this asset
As always, fully and accurately disclosing your interest in a lawsuit or cause of action is important for you because failure to do so can have serious consequences for your bankruptcy case and your ability to receive a discharge.
Additionally, if you represent to the bankruptcy court that you do not have a claim against someone (which is what not listing it on your schedules does), that can be used against you later in the lawsuit. If you intentionally leave your lawsuit out of your schedules, the defendant in the lawsuit can successfully argue that you should not now be allowed to pursue your lawsuit. Basically, you can't say one thing to one court and the opposite to another court.
What Chapter of bankruptcy you file makes a difference
In Chapter 7 cases, your creditors are entitled to certain assets that exist as of the date your bankruptcy case is filed. Except for very limited circumstances dealing with inheritances, you will be able to keep any assets or property that you become entitled to receive (or actually receive) after your case is filed. That’s what getting a fresh start is all about.
This means if you get in an accident after your Chapter 7 bankruptcy has been filed, you can keep the money from the resulting lawsuit or settlement. It does not mean that simply waiting to file your lawsuit allows you to keep this asset out of your bankruptcy estate. It's the date of the accident or injury that matters, not the date your lawsuit is filed.
Things get a little more complicated if your lawsuit or cause of action is not due to an accident. With some things it can be a little harder to determine when your injury occurred (and your right to sue arose). The bottom line here is that even if you did not know about it at the time your bankruptcy case was filed, the bankruptcy court could determine that based on the circumstances, you had the right to sue even before your bankruptcy was filed. In that case, the cause of action belongs to your bankruptcy estate, even though you did not know about it. Answering that question is very fact intensive and depends in large part on your state's laws with respect to when your right to sue first came into being.
It's a little different in Chapter 13 cases
In a Chapter 13, certain "after-acquired property" - so money or things you receive after your Chapter 13 bankruptcy is filed but before your plan is completed and your discharge is entered - is pulled into the bankruptcy estate. That means even if you have an accident after your bankruptcy filing, the money you are entitled to receive as a result of it may need to be turned over to the Trustee. In that case, it becomes especially important that your medical providers have their liens in place (see below for more) so you can avoid the absolute worst case scenario of losing your money and ending up with a bunch of medical debt that won't be discharged.
Let's assume you don't have the money yet, but there is a pending or potential lawsuit. Now that we have established that you have to list your lawsuit, what does that mean? Well, it does not automatically mean that you lose your money from the lawsuit. As with all assets, the question you have to ask is whether an exemption is available to protect this asset.
Federal bankruptcy exemptions protect up to $25,150.00 received as the result of a personal bodily injury (with some exceptions). Federal bankruptcy exemptions also protect:
Payments you receive to compensate you for lost future earnings, at least to the extent necessary to support you;
Payments you receive due to the wrongful death of certain individuals, again, to the extent necessary to support you; and
All payments you are entitled to receive under a crime victim’s reparation law.
If you are in an “opt-out” state (one that does not allow the use federal exemptions), you have to look to your state's exemptions to determine whether the money you get from a lawsuit is protected. Some states have explicit exemptions for that purpose, others have “wildcard” exemptions you can use to protect at least a portion of the money. Yet others have no protections at all, not even for funds you will receive due to an injury you sustained.
A few other things to consider
What happens to your medical expenses?
If your cause of action is related to an accident that happened recently, make sure you talk to your personal injury attorney (or your medical providers, if you don't have an attorney helping you) about medical liens. After all, you want to make sure you are able to continue getting treatment for your injuries, and your medical providers want to make sure they get paid. Typically, this is accomplished by placing a lien on the money you win in your lawsuit or settlement, so your doctors can get paid from the money generated by the lawsuit. Not all states require that a formal "lien" is recorded and that can complicate things.
If your Trustee steps in your shoes and the funds are distributed to your creditors, especially if you are in ongoing treatment and expect to have more medical expenses from the accident after your bankruptcy is filed, the lack of a valid and enforceable lien for the benefit of your medical provider could mean they don't get paid from the money you are entitled to from the lawsuit and you're still responsible for paying them (for charges incurred after your bankruptcy has been filed).
Having your attorney continue handling the case
If you have an attorney helping you with your lawsuit (which makes sense in personal injury lawsuits, where attorneys often don't get paid unless and until you get paid), make sure you talk to them about your bankruptcy. Even if the Trustee steps in your shoes and continues the lawsuit on behalf of your creditors, it likely makes sense for your attorney to stay on the case (since he/she is the person you are comfortable with already and knows the facts of your case). In order to stay on your case even after the Trustee takes over, your personal injury attorney will have to be appointed by the bankruptcy court. The best way to get that done is to have them reach out to your Trustee as soon as possible to alert them to the pending claim and your attorney’s ability (and willingness) to stay on the case. As long as your attorney is appointed by the court, he/she will be paid for the work put in.
Duty to cooperate with the Trustee
Even if your cause of action is not protected by any exemptions (meaning you will not be able to keep the money from the lawsuit), you do have a duty to cooperate with the Trustee in pursuing it on behalf of your creditors. In other words, a strategy of “if I can’t have the money then I’m not lifting a finger to help get the money for my creditors” is not a good idea as it risks your discharge.
Generally speaking, you can keep money that you receive from a lawsuit to the extent it is protected by exemptions, either federal exemptions or your state’s exemptions. If your state does not have exemption laws you can apply to protect the proceeds from the lawsuit, you will not be entitled to keep it. Instead it is used to pay your creditors. The most important thing for folks in this position to consider is the “big picture” and remember that if you do not have the benefit of the automatic stay or a discharge, your creditors will be able to reach any funds paid to you as a result of the lawsuit regardless. Thus, depending on what you are dealing with on a day-to-day basis, such as stretching every dollar to the maximum because your wages are being garnished, it may make sense for you to file for bankruptcy protection even if that means you will lose part or all of the money from the lawsuit.