Does My Bankruptcy Affect My Personal Injury Case?
Yes. If you have a personal injury suit and you declare bankruptcy your suit, and any money you receive from it, will become an “asset of bankruptcy estate”. This means any money from the personal injury suit will go into the bankruptcy estate.
What does this actually mean?
Let’s start off by describing (very basically) the two kinds of bankruptcy that an individual can declare – Chapter 7 and Chapter 13:
Chapter 7 – This is “liquidation” bankruptcy. All of your assets are subject to liquidation (being sold or converted into cash) by the Trustee to satisfy your debts.
Chapter 13 – This is “reorganization” bankruptcy. All of your disposable income is used to pay off your debts.
So does it matter if I declare Chapter 7 or 13 Bankruptcy?
Not for purposes of your personal injury suit. If you file under Chapter 7, your suit is considered an asset, and so any proceeds from it will be used to pay off your debts. If you filed under Chapter 13, any proceeds from your suit are considered income, and so that money is likewise used to pay off your debts.
The issue of timing:
There is one wrinkle to add about the timing of the personal injury suit and declaring bankruptcy: if you declare under Chapter 7 and the personal injury suit arose after you filed for bankruptcy, then it’s possible that the suit would not be part of the bankruptcy estate. Note: this doesn’t just mean that you can wait to file the personal injury action with the court until after declaring bankruptcy. If you have questions about this, you should speak to a lawyer directly.
If you are thinking about declaring bankruptcy and you have a personal injury suit, you should speak to a lawyer about your options. While a bankruptcy can be a good fresh start for someone seeking to start over financially, it can have unintended consequences and affect money you may have received from a personal injury suit.