When a debtor files for bankruptcy and is involved in a personal injury claim, either as the plaintiff or as the defendant, there are several factors to address and consider.
In a bankruptcy, federal and state laws allow for certain types and amounts of property to be exempt from claims by the trustee and creditors. In the case of a personal injury claim, a debtor does not have to already have received a judgment in the lawsuit for the award to be considered property of the bankruptcy estate. At the time of filing, there must only be a cause of action on which the statute of limitations has not yet run. That claim must be listed on the bankruptcy petition as personal property, regardless of whether or not the debtor has any intention of pursuing it. Once the debtor has filed for bankruptcy, the debtor no longer owns that cause of action: the claim has become property of the bankruptcy estate [11 U.S.C. §541(a)].
The trustee in effect steps into the shoes of the debtor and will hire an attorney to handle claim. The relationship that the trustee has with the personal injury attorney is a standard attorney-client relationship, including the customary contingency fee arrangement in a personal injury case.
Once damages have been awarded, they get apportioned in the following order: the personal injury attorney subtracts his fees, the exempted amount goes to the debtor, the trustee takes his percentage of the award, and the creditors who have submitted proofs of claims get their portion. Any remaining money goes back to the debtor. A trustee may choose to abandon the claim if there is not likely to be enough left over to pay himself or the creditors. In such an instance, the trustee will allow the debtor to keep ownership of the claim and the debtor can therefore pursue the claim as he would have done had there not been a bankruptcy.
There are different types of damages that may be awarded in a personal injury settlement and they are not treated the same. Damages in a personal injury cases can fall into one of two categories: General or Special. General damages are non-pecuniary and include pain and suffering, disability, mental anguish. Special damages are pecuniary in nature and include financial losses suffered by the defendant as a result of the injury, such as medical expenses, property damage, and lost wages.
The amount of money from the settlement of a claim that a debtor is able to keep is related to which exemption scheme the debtor uses: federal or state. The debtor’s attorney will have to evaluate which scheme is most beneficial to use for his client, taking into consideration not only the potential personal injury settlement, but also the rest of the debtor’s property.
Using the federal exemption guidelines, there are a few different ways to exempt damages. Under 11 U.S.C. §522(d)(11), permanent bodily injury and future special damages are exempt. Permanent bodily injury is exempt up to the amount of $20,200 [11 U.S.C. §522(d)(11)(D] ¸ while future special damages are exempt up “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor” [11 U.S.C. §522(d)(11)(E)]. Similarly, where there is a “wrongful death of an individual of whom the debtor was a dependent” damages are exempt “to the extent reasonably necessary for the support of the debtor and any dependant of the debtor” [11 U.S.C. §522(d)(11)(B)].
Any damages that are not encompassed in the preceding exemptions, such as pain and suffering or past special damages, may fall into the catchall 11 U.S.C. §522(d)(5) exemption which provides for $1,075 plus the unused portion of the homestead exemption up to $10,125. This (d)(5) exemption is used for all of the debtor’s property which exceeds or is not included in a specific exemption.
Under the State of Minnesota’s exemption guidelines, “rights of action for injuries to the person of the debtor or of a relative whether or not resulting in death” are exempt [Minn. Stat. 550.37(22)]. In other words, all general damages, including pain and suffering, are exempt. There is no monetary cap. There is no comparable catchall exemption in Minnesota’s exemption scheme to exempt the residual damages.
Also important to keep in mind is that if there are effects on a debtor whose personal property includes a personal injury claim, there must also be consequences for a debtor whose debts include a personal injury judgment against him. When a debtor is a defendant in a personal injury case, he has a creditor in the person who has obtained the judgment. Not every such creditor’s claim may be discharged. For example, where the debts arose because of “willful and malicious injury by the debtor to another entity or to the property of another entity” it will not be discharged [11 U.S.C. § 523(a)(6)]. The plaintiff in the case is the creditor and must prove by clear and convincing evidence that the injury was a result of willful or malicious action on the part of the defendant debtor [In re Gargac, 93 B.R. 594, 18 Bankr.Ct.Dec. 924; Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1262 (11th Cir.1988); ].
A debtor should also be aware that a judgment against the debtor is not dischargeable where the debtor caused death or personal injury 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” [11 U.S.C. §523(a)(9)].