How Does Bankruptcy Affect a Personal Injury Award?

Winning a personal injury lawsuit does not guarantee you will receive an immediate payout from the responsible party. In many cases, a defendant may lack the financial resources to pay a judgment (and other debts) and seek protection through bankruptcy. On the other side, a victim faced with mounting medical bills and limited income may have to seek bankruptcy protection before or after filing a personal injury lawsuit. So, how exactly does bankruptcy affect personal injury judgments?

If the Defendant Files for Bankruptcy

You often read headlines about plaintiffs winning multi-million dollar verdicts in personal injury cases. That is great when the defendant is a large company or public agency, but many individual defendants are unable to pay such damage awards. Unless the parties negotiate a settlement, the defendant may seek refuge in the bankruptcy courts.

Unlike personal injury cases, which are generally tried in state courts under state law, bankruptcy is a purely federal matter. If you win a judgment in New York State court and the defendant files for bankruptcy, you may be out of luck. Judgments arising from a defendant's negligence can generally be discharged in a Chapter 7 bankruptcy.

However, not all personal injury judgments can be discharged. If the debtor intentionally harmed the victim, any subsequent personal injury award would be protected from bankruptcy. Similarly, federal federal bankruptcy law law expressly forbids a court from discharging any debt arising from “death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”

That said, even if a personal injury judgment cannot be discharged outright, the bankruptcy courts may afford a defendant more time to pay the damage award. In a Chapter 13 bankruptcy, the debtor can establish a court-supervised payment plan for debts. This can give the debtor up to five years to repay all “priority” debts, including non-dischargable personal injury awards. A Chapter 13 bankruptcy may also allow holders of otherwise dischargable personal injury awards to recover some money over time.

If the Plaintiff Files for Bankruptcy

But, what if you are the victim and are faced with bankruptcy? Does filing for bankruptcy affect your ability to recover damages in a personal injury lawsuit? The answer depends on how much you actually stand to recover.

When you file for bankruptcy, some of your assets are automatically exempt from the process. Federal law allows a debtor to exempt up to $22,975 from a personal injury judgment. This exemption, however, only applies to economic damages, including medical bills and lost wages, and not any award for “pain and suffering or for pecuniary loss,” such as the loss of a family member. Any non-exempt portion of your judgment may be taken by the bankruptcy court and used to pay off your creditors.

Also keep in mind, if your personal injury lawsuit is still pending when you file for a Chapter 7 bankruptcy, a court-appointed trustee can take control of the case and settle it without your approval. (If you file for a Chapter 13 bankruptcy, you may retain control of a pending personal injury lawsuit, but any non-exempt award is still subject to creditor claims.)

Hopefully, bankruptcy will not be an issue for either party when it comes to dealing with a personal injury lawsuit. But, it is something you should be aware of if you are contemplating such a claim. An experienced New York personal injury attorney can advise you on this and other aspects of the legal process. Contact our office today if you would like to speak with an attorney right away.