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Be Careful Resolving Personal Injury Claims in Bankruptcy

Debtors in bankruptcy are entitled to exemptions under the law to protect assets up to a specified value. These exemptions arise out of both state law and federal bankruptcy law, but New Jersey residents usually opt for the federal ones. Virtually all of said exemptions refer to specific categories of assets (e.g. home equity, jewelry, motor vehicles), and involve being fairly specific when matching them up with items on your asset list. The three main exemptions in personal injury actions are as follows:

  • compensation for loss of future earnings of the debtor or adependent, to the extent necessary for support
  • Any "payment, not to exceed $22,975, on account of personal bodily injury, not including pain and suffering or compensation for actual monetary loss of the debtor or a dependent."
  • Any "payment on account of the wrongful death of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor."

There is also a "wildcard" exemption that can be applied to any asset, but has a maximum available amount for the debtor (or for each debtor if a married couple is filing) of $11,500.

Applying the Exemptions Isn't All That Easy

The application of these exemptions can be somewhat problematic when the asset has no clear value at the time the bankruptcy is filed, such as potential damages in a pending personal injury lawsuit. In that case, you or your attorney must anticipate what exemptions might apply, list them, and then be sure that when a figure for said damages is fixed (either through settlement or a court award after trial) that said exemptions apply properly to each category.

What Can Happen If You're Not Careful!

The problem comes in when cases are settled (or jury awards are given) for a certain sum without breaking it down into its component parts (i.e. how much for lost wages, pain and suffering, medical bills, or lost earning potential).

This happened in a case decided by the bankruptcy court in the Western District of Pennsylvania, In re Kelin. In that case, the debtors asserted all the applicable exemptions in their case (including the "wild card"), but settled the personal injury suit for a lump sum of $60,000, without identifying how that number broke down.

The trustee tried to obtain all of the money from the settlement after the attorneys fees and costs were paid. In opposition, the debtors did not present evidence to show that any of that money constituted future lost earnings potential and/or compensation for personal bodily injury other than pain and suffering.

On the contrary, the trustee presented evidence that the actual pecuniary loss suffered by the debtor exceeded the net proceeds from the settlement. The court then applied the "wild card" exemption to those proceeds, since it is not an asset-specific exemption, and gave the rest of the money to the trustee!

What Do You Do?

This case is a cautionary tale that should urge you to work with your personal injury attorneys during the pendency of the bankruptcy to insure that, to the extent legally and ethically possible, the court documents on a settlement or court award properly identify the categories of damages for which the award or settlement is compensating the debtor, so that exemptions can be accurately applied. Only through thoughtful and careful planning can a debtor retain the maximum amount he or she is entitled to for a sustained personal injury or wrongful death.

If you are in the middle of a pending personal injury lawsuit that doesn't look like it is going to end in money any time soon, and you are considering bankruptcy, please give my office a call at 856-432-4113 or contact me through this site for a free consultation to protect your rights.

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