Bankruptcy and Personal Injury Claims
On this page we look at what happens when a plaintiff in a personal injury case files for bankruptcy. People with personal injury cases file bankruptcy all the time. Getting seriously hurt in an auto accident or by negligent medical care can be a major financial hardship. Many of our personal injury clients end up filing bankruptcy while their case is pending (or shortly after it settles). The question that always arises in these situations is whether you will get to keep your personal injury settlement if you file bankruptcy. The answer (explained in more detail below) is yes – you will mostly likely get to keep your personal injury settlement even if you file bankruptcy.
Chapter 7 Bankruptcy
When you file bankruptcy, you are legally obligated to disclose all of your assets and property. A personal injury lawsuit is considered an asset and it MUST be disclosed in the bankruptcy. In fact, there is actually a special section in the bankruptcy petition form for listing claims against third parties.
All of your property and assets (including the personal injury claim) must be protected by a legal “exemption” or they will become part of the bankruptcy estate. All debtors get to chose between state law exemption or federal exemptions. In some states this can make a big difference, but in Maryland the state law exemptions always give you more protection.
In most Chapter 7 bankruptcies in Maryland, all of the debtor’s assets are fully protected by the state exemptions. When all assets are covered by exemptions, the case is considered a “no asset” bankruptcy. In a no asset case, all unsecured debts get discharged (except for certain things like child support or student loans) and creditors get nothing. If the exemptions are not enough to fully protect the value of the debtor’s assets, the Ch. 7 bankruptcy trustee will sell the non-exempt portion of the assets and give the sale proceeds to the creditors.
Maryland’s Exemption for Personal Injury Settlements in Bankruptcies
The settlement proceeds in a debtor’s personal injury lawsuit can be protected under Maryland’s “personal injury” exemption – Md. Code Ann., Cts. & Jud. Proc. § 11-504(b)(2). Maryland’s personal injury exemption protects “money payable in the event of sickness, accident, injury, or death of any person[.]”
The best part about this exemption is that it is unlimited. There is no maximum limit or cap on the amount of money that can be protected under Maryland’s personal injury exemption. Even a $10 million dollar settlement can be fully exempt and protected in bankruptcy.
As great as this may sound, Maryland’s personal injury exemption does have one significant limitation. The exemption only applies to the portion of the settlement proceeds that are labeled as compensation for future lost income or pain & suffering. Compensation for prior lost income and past medical expenses are not protected under the exemption. This limitation has been imposed by a series of appellate cases in which the courts held that Maryland’s personal injury exemption only applies to compensation for “injuries to the person” and not property damages.
Most Settlement Awards Will be Fully Exempt Anyways
Even though Maryland’s personal injury exemption does not cover certain types of compensation, the full amount of most settlement awards will almost always be protected. Why? Because the full amount of any settlement is usually protected by the language of the settlement agreement.
The treatment of settlement proceeds in bankruptcy (i.e., whether the proceeds are compensation for past wages, pain & suffering, etc.) is governed by the language of the settlement agreement. If the settlement agreement describes a portion of the proceeds as compensation for “past lost wages” or “past medical expenses,” then those portions of the settlement will NOT be exempt in the bankruptcy. However, as long as the language of the agreement does not label the settlement proceeds as compensation for past wages or medical expenses then the fully amount will be safely protected by the personal injury exemption.
Jury Verdicts are Harder to Protect
As explained above, most settlement awards will be fully exempt as long as the settlement agreement doesn’t label a portion of the proceeds as past lost wages or medical expenses. It’s a totally different ballgame, however, if you go to trial and a get a jury award. Unlike settlement agreements, jury verdicts always are always apportioned based on the type of compensation awarded. The verdict sheet will identify the amount of damages awarded for pain & suffering, future lost wages & medical expenses, and past expenses. Here is an example of a typical verdict awarding damages to a personal injury plaintiff:
Past Medical Expenses: $30,000
Past Lost Wages: $10,000
Future Medical Expenses: $50,000
Future Lost Wages: $100,000
Pain & Suffering: $100,000
TOTAL DAMAGES = $290,000
When damages are itemized like this in jury verdicts, the bankruptcy trustee can and will go after the non-exempt part of the jury award (past medical expenses and past lost wages). In the example above, the $30,000 in past medical expenses and $10,000 in past wages would not be exempt.
Past vs. Future Lost Wages in Chapter 7
Economic damages (i.e., lost wages and medical expenses) are considered “property damages” and, therefore, not covered under Maryland’s personal injury exemption. However, in a Chapter 7 only the debtor’s pre-bankruptcy assets and property become part of the bankruptcy estate. Any wages that the debtor earns after the date that they file bankruptcy are not included. This is why a personal injury award for “future” lost earnings is always exempt.
Chapter 13 Bankruptcy Future Lost Income Damages Can be Included in Chapter 13
For the most part, the treatment of personal injury settlement proceeds in a Chapter 13 is the same as it is in a Chapter 7 bankruptcy. The Maryland personal injury exemption can be used to protect settlement proceeds in Ch. 13 the same way it does in Ch. 7. As long as the language of the settlement agreement does not label what type of compensation is being awarded, the settlement proceeds will be fully exempt in a Ch. 13.
There is one key difference: in a Chapter 13 future lost wages must be included in the bankruptcy and factor into the debtor’s plan payments. So let’s say a plaintiff gets a jury verdict that includes $50,000 in future lost wages. In a Chapter 7 those future lost wages would not get touched by the bankruptcy. In a Chapter 13, however, the debtor would be required to factor those future lost wages into their repayment. A large portion of the $50,000 would probably have to be paid back to their creditors.
FAQs: Bankruptcy and Personal Injury Cases
Will I Still Get to Keep My Personal Injury Settlement if I File Bankruptcy?
Yes. In Maryland, settlement proceeds in personal injury cases are fully exempt and protected if you file bankruptcy.
Do I Have to Disclose My Personal Injury Case on a Bankruptcy Petition?
Yes. When you file bankruptcy you are legally obligated to disclose ALL property and assets. If you have a personal injury claim or pending lawsuit that you might get money from that claim is considered an “asset” and it MUST be listed and disclosed in your bankruptcy.
Can I File Bankruptcy if I Have a Personal Injury Case Pending?
Yes. There is nothing preventing you from filing bankruptcy while you are a plaintiff in a pending personal injury lawsuit. You will just need to list your pending case on your bankruptcy petition when you file.
Will the Automatic Stay in Bankruptcy Stop My Personal Injury Case?
No. The automatic stay in bankruptcy only stays civil cases if you are the named defendant and the case could result in a money judgement against you. The automatic stay does not apply to cases in which the bankruptcy debtor is a plaintiff.
Contact Miller & Zois About Your Personal Injury Case
The Maryland personal injury attorneys can help get the compensation you need to get you back on your feet financially, even if you have to file bankruptcy. Call us today for a free consultation. Contact a Maryland bankruptcy lawyer for help filing bankruptcy.