How to Protect Your Injury Settlement From Creditors and the Bankruptcy Court

Posted in Personal Injury on February 13, 2019

Whenever an individual files for bankruptcy, his or her property could become subject to seizure to pay off debts. However, only certain types of property qualify for seizure in a Chapter Seven bankruptcy case, and the proceeds of a personal injury settlement would likely qualify as property. However, one can take steps to protect some or all of a personal injury settlement from creditors and the bankruptcy court, but the available options vary by state law.

What Is Chapter Seven Bankruptcy?

Chapter Seven bankruptcy refers to liquidation or “straight” bankruptcy; a bankruptcy trustee effectively cancels the bankrupt individual’s debts, but the individual may need to part with some personal property to cover their debts to certain creditors. During a Chapter Seven bankruptcy filing, an automatic stay prevents creditors from garnishing wages or seizing other assets like bank accounts until the conclusion of the bankruptcy case.

Filing for Chapter Seven bankruptcy essentially places one’s property and debts in the hands of the bankruptcy court. The individual will need to produce significant documentation to prove his or her financial situation, recent expenses, and recent sources of income. After filing for Chapter Seven bankruptcy, the individual can no longer sell or give away assets declared in the bankruptcy filing.

What Debts Will Chapter Seven Bankruptcy Discharge?

A Chapter Seven bankruptcy case may lead to the discharge of certain debts, but some such as student loans, most tax debts, and child support debts will not qualify. Chapter Seven bankruptcy also does not apply to debts incurred through fraud or illegal activity. Credit card debts, auto loans, and other debts may qualify, but the debtor will need to cover his or her obligations to those creditors in some form. This could lead to vehicle repossession or the seizure of other property.

While this may lead a debtor to assume all his or her personal possessions are subject to seizure, a creditor will likely abandon any property that would be too difficult to sell, effectively allowing the debtor to keep it. For example, a debtor may have a potentially valuable baseball card collection but collecting the proceeds from its value would be too time-consuming for the creditor, so the creditor simply abandons the collection and no longer considers it eligible for seizure.

Protecting an Injury Settlement From Creditors

If you received an injury settlement prior to filing for Chapter Seven bankruptcy, the settlement qualifies as property for the purposes of bankruptcy court filings. Generally, the settlement could go to your creditors to settle the debts covered by your bankruptcy filing. However, state law may afford some leeway in this regard, and bankruptcy laws generally aim to allow the debtor a fresh start with the personal property and other assets necessary to carry on.

• Exempt settlements. Different exemption standards exist at the federal and state levels. In some states, a debtor may have the option of choosing whichever would result in his or her retaining more personal property and assets. Some states allow a debtor to keep all the proceeds of a personal injury settlement while others only allow this for wrongful death settlements. Ultimately, state law is the most common determining factor when it comes to exemption standards.
• Wildcard exemptions. Some states allow for wildcard exemptions that essentially allow a debtor to select certain pieces of property or assets for exemption, but only up to a certain dollar amount. For example, if your state’s wildcard exemption allows you to select up to $25,000 of property for exemption and you received a $50,000 personal injury settlement, you could opt to have $25,000 of it exempt from seizure.

An attorney is a great resource if you have concerns about your Chapter Seven bankruptcy process or questions about tax implications and debt-related issues after receiving a personal injury settlement.