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Filing Bankruptcy After a Personal Injury

Multiple studies over the last ten years have shown that medical debt is the leading reason that individuals file for bankruptcy.  If someone is injured in a car accident, he or she may have to take time off work, and if that person had been barely scraping by, a week or two of lost wages can be disastrous for that individual’s personal finances.  Add on top of that unexpected medical bills, and what had previously been a manageable debt situation quickly spirals out of control.  

However, a person suffering financially from an injury due to a car accident - especially if she was not at fault - may run into some troubles later on in the bankruptcy process.  When a person files for bankruptcy, all the debtor’s assets become part of the bankruptcy estate.  The debtor is allowed to keep up to certain dollar values of her assets in a Chapter 7.  If, however, the debtor owns more than the exemptions allow the debtor to keep, the bankruptcy trustee will liquidate or sell off those assets and distribute the proceeds to the debtor’s creditors.  One asset people often do not think of is a claim for personal injury, such as a car accident.  If a person was injured in a car accident and has a claim against the other driver and his or her insurance company, any money the driver/debtor is entitled to is an asset of that person’s bankruptcy estate and is subject to disbursement by the trustee.  This is true even if the other driver hasn’t yet paid a dime; just the potential claim itself is an asset.
Currently, a Chapter 7 debtor is allowed to retain up to $22,975 under the federal exemptions and up to $20,000 under the Washington State exemptions of payments on account of a personal bodily injury, “not including pain and suffering or compensation for actual pecuniary loss.”  This language excluding certain funds from the exemption have caused significant uncertainty regarding whether or not an injured debtor can keep personal injury settlement proceeds, and if so, how much.
If you have suffered a personal injury, such as a car accident, slip and fall, or an on-the-job injury, and are looking to file for bankruptcy, don’t go it on your own. You may be inadvertently giving your settlement to the bankruptcy court.  Get the advice of an experienced attorney in order to determine whether filing for bankruptcy is right for you.