Personal Injury Cases and Bankruptcy

If you’re a plaintiff’s personal injury attorney (or a plaintiff) and you think there might be an issue regarding bankruptcy law and practice you might find some helpful information on this page.

IT’S ESSENTIAL THAT YOUR PERSONAL INJURY CLIENT LIST THE PERSONAL INJURY CLAIM ON HIS BANKRUPTCY SCHEDULES.

You, as an attorney for the personal injury claimant, need to be sure to ask the client if he’s considering filing bankruptcy. If he is then you need to tell him to make sure he tells his bankruptcy attorney about the personal injury case. Ask the client about his financial situation and determine, yourself, if you think he might be someone that may be filing bankruptcy. If you conclude that he might be a candidate for filing bankruptcy consider referring him to a bankruptcy attorney so that you are not surprised later.

WHAT HAPPENS IF YOUR CLIENT DOESN’T LIST THE PERSONAL INJURY CASE AS AN ASSET IN HIS BANKRUPTCY?

Experienced and diligent personal injury defense attorneys will check to see if your personal injury client has ever filed for bankruptcy. If he has, the defense attorney will check to see if the cause of action arose before the bankruptcy case was filed and, if so, whether the personal injury claimant listed the personal injury claim as an asset.

There are cases e.g Berge v. Kuno Mader and DMG America, Inc., 354 Ill. Dec. 374, 957 N.E.2d 968(1st Dist. 2011) that hold that if the personal injury claimant failed to list the personal injury claim on his bankruptcy schedules the case can be dismissed on the basis that the claimant has lack of standing to pursue the claim.

This is the reasoning: When the client filed bankruptcy a bankruptcy estate was created and the personal injury claim became part of that bankruptcy estate. 11 U.S.C. §541(a) When the estate was created only the bankruptcy trustee had standing to pursue the claim – not the claimant himself.

The trustee is deemed to have abandoned the property in the bankruptcy estate if he does not take it over and the bankruptcy closes. But if the trustee did not know about the personal injury claim because it wasn’t listed in the bankruptcy, he is not deemed to have abandoned it.

The defense attorney may not make the motion to dismiss until after the statute of limitations has expired on the personal injury case. If the statute has expired then the personal injury client would be out of luck.

If the statute hasn’t expired and the bankruptcy is still open then the bankruptcy attorney can amend the schedules and include the personal injury claim as an asset. Then the issue will be whether and to what extent the personal injury claim is “exempt”. I’ll talk about that below.

If the bankruptcy case is closed it may be possible to file a motion to reopen the bankruptcy case and amend the schedules but there may be problems in claiming the exemption. Although the court may deny the motion to reopen. Carlos Meneses (05-86811-ast, Bankr.E.D.N.Y.).

Another problem in not listing the personal injury claim as an asset is that the omission may be bankruptcy fraud.

ASSUMING THE PERSONAL INJURY CLAIMANT HAS LISTED THE PERSONAL INJURY CASE IN HIS BANKRUPTCY WILL THE BANKRUPTCY COURT TAKE OVER THE CLAIM?

When I say “take over the claim” (the correct term is “administer”) I mean the trustee settles or litigates the claim himself and gives the money to the creditors, keeping a fee for his services as trustee. But the trustee must give the debtor the exempt amount off the top.

So the trustee must decide if there would be any money left over after the debtor receives his share off the top. The trustee would only administer the personal injury claim if he thinks there will be enough money left over after the debtor gets his share off the top to make it financially worthwhile to pursue. If the trustee decides it would not be financially worthwhile for him to pursue the personal injury case he abandons the asset. Once it’s abandoned ownership returns the debtor.

So, in other words, the answer to the question of whether the trustee will take over or administer the personal injury case and keep the money depends on whether, and to what extent, the personal injury claim is “exempt”.

One of the policies behind the bankruptcy laws is that a debtor should be able to keep enough property to allow him to launch a fresh start. The property that the debtor is allowed to keep is called his “exempt” property.

Each state enacts its own statutes listing out what property is exempt. There is a great deal of variation among the states as to what property will be considered exempt for its residents. California has 2 sets of exemptions or lists setting forth what property is exempt.

These 2 separate lists or sets of exemptions are usually called:

1) The 703 exemptions and

2) The 704 exemptions

The debtor, when he is declaring bankruptcy, must choose either the 703 exemptions or the 704 exemptions. He is not allowed to pick and choose from the 2 lists.

The exemption for the personal injury claim will be different depending on whether the client is using the 703 or the 704 exemptions.

Which set of exemptions is your personal injury client and his attorney likely to choose?

The answer to the question in most cases boils down to whether your client has a significant amount of equity in his home. If he does not have significant equity in his home he will probably use the 703 exemptions. If he does have significant equity in his home he will probably use the 704 exemptions.

The reason for this is that the 704 exemptions have a big homestead exemption ($75,000 – $175,000 depending on the situation) but the debtor can only use the homestead exemption to exempt his home – not other types of property. The 703 home exemption is much lower ($26,925) but if he doesn’t have home equity to protect he can use the exemption for any type of property. For this reason, the 703 home exemption is often referred to as the “wild card” exemption.

But having a personal injury claim can change this decision.

Let’s see how the decision (to use either the 703 or 704 exemptions) impacts on the personal injury claim.

THE 703 EXEMPTIONS APPLIED TO PERSONAL INJURY CASES

Under the 703 exemptions, effective January 1, 2013 claims for personal injury are exempt up to $24,060. CCP 703.140(b)(11)(D). The language of the statute says the following is exempt:

“A payment, not to exceed twenty-four thousand sixty dollars
($24,060), on account of personal bodily injury of the debtor or an
individual of whom the debtor is a dependent.”

And on top of that under CCP 703.140(b)(11)(E) future loss of earnings are exempt to the extent they are “reasonably necessary” to the debtor or the debtor’s dependents. Here’s the language which says the following is exempt:

“A payment in compensation of loss of future earnings of the
debtor or an individual of whom the debtor is or was a dependent, to
the extent reasonably necessary for the support of the debtor and any
dependent of the debtor.”

In addition to the above the debtor has the “wild card” exemption. To the extent the debtor hasn’t already used his wild card exemption for some other property he can use it to exempt his personal injury claim.

That’s potentially $50,985 plus future loss of earnings to the extent the debtor will need the money for support or the support of a dependent.

Liens should be deducted from the value of the claim as well as attorney’s fees.

Now let’s have a look at the 704 exemptions.

There is one exemption for a personal injury case that has not been paid yet. When a personal
injury cause of action (the right to sue) has not yet been reduced to a judgment and paid,
the entire claim is exempt. CCP. Code § 704.140 (a).

But after the claim has been paid the money is exempt, but only to the extent that it is reasonably necessary for the support of the debtor and the debtor’s dependents. CCP. Code § 704.140 (b)

If the award or settlement is payable in installments, each payment is exempt except to the extent that the same amount of earnings would be subject to wage garnishment. That’s generally 25%. CCP. Code § 704.140 (d)

So what can we get out this exemption analysis?

For unpaid personal injury claims, if the client has significant equity in his home he’ll be looking to use the 704 exemptions because of the big homestead exemption and most people want to keep their homes. And if he has a big (his share over around $50,000) unpaid personal injury claim he will also probably want to use the 704 exemptions because of the unlimited exemption.

But if he has a smaller unpaid personal injury case (his share under around $25,000 – $50,000) and he doesn’t have significant equity in his home he may want to consider using the 703 exemptions because the 703 personal injury exemption will be enough. That way he may be able to use the wild card exemption to exempt cash in the bank.

This is an oversimplification Because there are other considerations when choosing the exemptions. For example, the vehicle exemption is larger under 703 than 704 but the jewelry exemption is larger under 704 than 703.

If the personal injury claim has been paid the 704 exemption loses some of the appeal because the exemptions is limited to an amount “reasonably necessary for the support of the debtor and the debtor’s dependents”. That issue could be hotly contested by the bankruptcy trustee.

CAN THE PERSONAL INJURY CLAIMANT’S BILLS BE DISCHARGED IN BANKRUPTCY?

The general answer is “yes” as long as they are not secured by liens. The 704 exemption has an exception for the health care providers in the personal injury case.

What about the personal injury claimants' duty to reimburse the med pay carrier or the health insurance company? I am aware of no reason why those debts are not discharged in bankruptcy. I have listed these debts for clients and have never received an objection from the med pay carrier or health insurance company. If the medical bill payor has a lien, it would be different e.g. Medi Cal.

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