The Federal Bankruptcy Code, deferring to the New York Debtor & Creditor Law Section 282, allows an individual a “personal injury exemption” of $7,500 of a personal injury settlement recovered by debtors in New York State (“not including pain and suffering or compensation for actual pecuniary loss…or a payment in compensation of loss of future earning.”)
Many times a client will come in for a bankruptcy consultation and advise me that she is a plaintiff in a personal injury lawsuit, or that she is still within the Statute of Limitations (3 years) to commence a personal injury action.
The personal injury action, or the right to sue for a personal injury, is deemed an asset of the debtor under the Bankruptcy Code.
If the debtor files a bankruptcy while the personal injury lawsuit is pending, or during the Statute of Limitations period, then the Bankruptcy Trustee assigned to the bankruptcy case receives an automatic lien on any potential proceeds, and has the right to either take over the personal injury litigation, or retain the personal injury attorney as the Trustee’s attorney, thereby ensuring that the Trustee will recover any personal injury recovery in excess of $7,500. The remainder of the personal injury settlement in excess of the first $7,500 will be used to pay the Trustee, the Trustee’s attorney or personal injury attorney, and the remaining creditors.
Some complications may arise when a personal injury attorney has already received the proceeds of a settlement, or has promised medical creditors or medical experts a lien on the settlement proceeds.
There are options available to the debtor, and strategic bankruptcy planning between the bankruptcy attorney and the personal injury attorney is essential. Some debtors may need to file a bankruptcy case while the personal injury case is still pending (to stop a foreclosure sale or creditor bank restraint or garnishment). A Chapter 13 bankruptcy filing can usually be commenced and then voluntarily withdrawn, but a Chapter 7 case can not be withdrawn, especially with a personal injury action that counts as a potential asset of the debtor.
Therefore, if a client is contemplating a bankruptcy while the personal injury lawsuit is pending or during the Statute of Limitations period, it is best to consult a competent bankruptcy attorney before commencing suit or settling the personal injury action.