Whether or not you can keep your personal injury settlement award when you file for bankruptcy depends on a number of different factors.
Written by Attorney Eva Bacevice.
Updated July 28, 2023
It is certainly possible that you will lose a personal injury settlement award if you file a bankruptcy case. It is not, however, always the case as you may be able to protect all or some of the funds you receive. There are a number of factors which will impact whether or not you can keep a portion (or all) of your personal injury settlement award.
Whenever you file a bankruptcy case it creates a bankruptcy estate, which includes all of your property and assets. Proceeds from a personal injury lawsuit are absolutely included in your bankruptcy estate and will need to be disclosed in your bankruptcy paperwork. You even need to disclose a potential lawsuit that you know about at the time of filing for bankruptcy. Always remember that you are signing your bankruptcy paperwork under penalty of perjury and it is extremely important to disclose everything.
All of your property which is included in the bankruptcy estate is subject to being turned over to the bankruptcy trustee to be sold to pay back your creditors. That being said, no one should be left destitute after filing a bankruptcy because that would not give the intended opportunity for a fresh start. So within bankruptcy law you are able to protect property for various amounts through the use of exemptions.
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Exemptions can vary significantly depending on where you live. While there is a set of federal bankruptcy exemptions, Congress also allowed each state to set their own. States can choose to opt out of federal exemptions entirely and only allow the state exemptions to be chosen, or states can allow their residents to choose between them, which is possible in roughly one-third of the country. Please note that you are never allowed to combine state and federal exemptions. You can only use one set.
As such, exemptions can vary significantly depending on your state’s exemptions. Some states will allow for a full exemption (complete protection) of any personal injury settlement award. Some states will limit how much you are able to keep (often a determination of how much support you and your family need) regardless of the type of case. Others will only protect the proceeds of a wrongful death lawsuit.
In federal exemptions, there is something called a “wildcard” exemption that you can apply to anything that does not fit into the regular allowed exemptions for personal property. If you have the option and have chosen federal exemptions you can protect any lawsuit proceeds up to the federal wildcard exemption amount. Some states also offer a wildcard exemption, which can vary quite a bit.
Timing is also important in determining whether you can keep all or some of your personal injury settlement award. Keep in mind that the key timing issue is regarding when you are entitled to a claim or cause of action, not when you receive the award. This is why you must disclose any potential lawsuits, that you know of, at the time that you file your bankruptcy case if you want to protect any of the proceeds received after filing for bankruptcy.
There are possible personal injury cases that can arise after you have filed your bankruptcy case. In this scenario, it is important to amend your documents and inform the trustee of the new development. Here, the type of bankruptcy you have filed under will also make a difference.
Type of bankruptcy
In a Chapter 7 case, where you are seeking a total discharge of your debts, it is much more likely that the trustee will be interested in taking your personal injury settlement award to share among your creditors. In a Chapter 13, however, you might have more options.
In a Chapter 13 case, whether or not you get to keep your personal injury settlement award will depend on the terms of your Chapter 13 plan. If your plan requires that you pay back your general unsecured creditors at 100%, it’s unlikely that you will have to surrender your award.
There can be a wide variation of treatment for personal injury settlement awards. As such, it is important to understand the rules and options available where you live prior to deciding whether to file a bankruptcy case.
If you decide that you do not want to risk losing a personal injury settlement award, or figure out that you cannot protect as much of it as you would like, you might want to consider exploring some alternative options to deal with your debt.