Protecting Your Personal Injury in Bankruptcy
When you file bankruptcy, with very few exceptions, all property you own becomes part of what is called the bankruptcy estate. “Bankruptcy estate” is a really broad concept that means all legal and equitable interests you possess on the date you file your case. There are obvious property interests, such as bank accounts, cars and homes. But the bankruptcy estate includes other less obvious interests: HSA/FSA accounts, prepaid flights, season tickets to a sporting event, and, you guessed it, a personal injury claim.
It does not matter if you filed a lawsuit or not. Your very right to file a lawsuit is property of the bankruptcy estate and must be listed, even if you don’t want to pursue it. There are some things to consider with your claim and bankruptcy.
Personal Injury Exemptions
Exemptions are how we keep property in bankruptcy. We identify the property, value it, and find a matching exemption to protect and keep that property. There are exemptions for cash, cars, homes, household goods, and many other possessions up to a certain amount. You can see a common list of exemptions here.
You’ll notice there are two types of exemptions, some under something called 703 and something under 704. This refers to different laws of exemptions. When you use California exemptions, you have to pick either to use 703 or 704 exemptions; you cannot pick and choose between both of them.
Which set of exemptions you choose depends on which set of exemptions provides you the best protection overall for your assets, including your personal injury claim.
Under the 703 exemption, you can exempt up to $26,800 of your claim. Under 704, there is no dollar limit, but permits protection to the “extent necessary for the support of” you, your spouse, and your dependents. This “extent necessary” language leads to different interpretations based on the circumstances.
Choosing which exemption is best depends on a few factors, including the value of your claim, other property you own that require using their own 703 or 704 exemptions, your risk tolerance, plus other considerations.
The chapter of bankruptcy you file has very different consequences. If you file Chapter 13, you actually control the property of estate; you control the personal injury claim. You can pursue the claim, retain the counsel of your choice and settle or litigate as is appropriate. Your personal injury claim, if valuable, can impact how much you must pay into your Chapter 13.
In a Chapter 7, the result is very different. The Chapter 7 trustee takes control of the bankruptcy estate. That means she controls the personal injury claim that is part of the estate. She can take over your case, dismiss it, settle for what you might think is a low amount, hire and fire counsel as she sees fit. Chapter 7 is a potential loss of control. If you can exempt the entire claim, then it’s protected from the trustee.
It is important to try to get a realistic understanding of the value of your personal injury claim. And that is often a difficult task and they can range greatly in value.
Lots of Grey Area
Valuing your personal injury claim is a highly imperfect process. Add to that your other items that need their own exemptions, the needs of you and your family, and whether you are even eligible for the chapter of bankruptcy you wish to pursue. There are many other pieces that come together when putting together the bankruptcy puzzle.
Given this complicated set of problems that can result in you keeping or losing a valuable personal injury claim, be sure a you hire a competent bankruptcy attorney to assist you.