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What Happens to Auto Accident Settlement or Judgment Money When You File Bankruptcy? 08/21/2017

It is an extremely difficult situation for those who are considering bankruptcy due to their financial difficulties who also have to deal with an auto accident at the same time.  Moreover, when these individuals find out that the settlement or judgment money will become part of the bankruptcy estate and used to pay off creditors, such clients truly feel a sense of despair that cannot be expressed in words. However, it is important to highlight the reality that filing bankruptcy does not necessarily mean that such settlement or judgment money will become part of the bankruptcy estate in its entirety.

There are exemption amounts that are allowed to protect personal injury related claims, just like there are exemptions to protect certain amounts for things such as a house, car, furniture, and other items that a debtor can protect even after having filed bankruptcy. Currently, the Bankruptcy Code allows a debtor to keep up to $23,675 received from a personal injury lawsuit or claim. This figure is doubled if a married couple filing a joint bankruptcy were both involved in the accident.

The amount that can be exempted from an auto accident compensation can be different for each bankruptcy case. For example, some clients think that as a married couple, they are automatically entitled to combine their exemptions to claim up to $47,350 for their personal injury related exemption. However, because the auto accident claim is considered as personal property of only the person involved in the accident, only $23, 675 can be claimed in a joint bankruptcy filing if only one person was involved in the accident. Furthermore, it is commonly thought that hospital fees can be discharged through a bankruptcy. However, if the hospital puts a lien on the unpaid fee amount, such liens are not discharged through a bankruptcy filing, and once you receive the compensation amount from your claim, the lien will have to be satisfied from the compensation amount. Also, the personal injury attorney’s fees are excluded from the total compensation amount as well.

There are some people who think that $23,675 is too small an amount for a situation where they are going through such severe hardship that follows from being injured in an accident. There are certain ways a bankruptcy attorney can help to increase this amount. One way is to use what is called the “wildcard” exemption. Such was the case with one of our recent clients who did not own a house. As per federal exemptions, there is a homestead exemption amount allowed for a homeowner to retain a certain amount of value from their home. Because there was no house involved in the bankruptcy, the wild card exemption allows up to a certain amount of unused homestead exemption to be used as part of the wildcard exemption, and the wildcard exemption can be applied to any personal property, including a personal injury claim or award. There are also instances where if a client requires ongoing medical treatment and is able to show that if such ongoing treatment is not received, the client will suffer from extreme hardship, additional amounts can be further claimed as part of the exemption. As such, depending on the particular case, the amount of exemption for personal injury that can be claimed under bankruptcy exemptions can vary.

In cases where the claims resulting from auto accidents are not disclosed fully in a bankruptcy filing, the exemptions cannot be claimed at all. If the trustee finds out later on that such disclosure was not made in the bankruptcy filing, the full amount of any settlement or awards may be distributed to the creditors. Moreover, if it is discovered that such non-disclosure was intentional, further legal ramifications based on the non-disclosure may result. Therefore, it is important to disclose any such claims and be completely honest and forthcoming with your bankruptcy attorney.

Some clients also ask about what happens to claims that arise after a bankruptcy is filed. According to bankruptcy law, only claims resulting from auto accidents occurring prior to a bankruptcy filing can be included in the bankruptcy filing. Although it is still possible for the trustee to obtain details of such accidents, any settlement or award amounts are not part of the bankruptcy estate since the claim arose after the bankruptcy was filed. As such, regardless of how much money you receive in such cases, you will be able to keep the entire amount even if you file bankruptcy.

Having to file bankruptcy and go through an auto accident can be a traumatizing situation that is difficult for anyone to deal with. However, it is important to remain calm and take proactive action, which includes retaining an experienced bankruptcy attorney to maximize the amount of personal property you can protect. If you have any questions about bankruptcy, please contact us at mail@songlawfirm.com.



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