In a Chapter 7 bankruptcy, you can discharge many or all of your debts. As part of the process, the trustee may take your property, which he or she will sell in order to pay debts owed to your creditors.
Proceeds from a Lawsuit and Bankruptcy
There are some state and federal laws that exempt some property from the bankruptcy estate. However, in the state of Illinois, proceeds from a lawsuit may not be exempt. Money that you have received from a lawsuit prior to filing bankruptcy, money you have not yet received in a legal claim, and money you may be entitled to receive, may all become part of your bankruptcy estate.
When you file for bankruptcy, you must disclose your interest in any legal claim, even if you do not intend to file suit. All claims you have in a settlement or lawsuit must be revealed when submitting your paperwork.
Personal Injury Claims in a Bankruptcy
Personal injury claims are no exception and must be reported when filing. It may be a claim arising from a car accident, a slip and fall, medical malpractice or a work-related accident. All personal injury claims are assets just like your car or furniture and must be disclosed in your schedules.
Although it may be tempting not to disclose an injury or potential claim, a debtor is required to disclose the fact that an injury occurred or a claim arose when filing. It is not uncommon for a trustee to seize personal injury awards several years after a debtor receives a bankruptcy discharge even when the claim went unreported.
- If an injury happens after you file for Chapter 7 bankruptcy, it is not part of the bankruptcy estate. You can keep any award or settlement.
- Under the personal injury exemption of bankruptcy code, you can keep a portion of a personal injury award or settlement, not including pain and suffering or compensation for monetary losses.
- In addition to the personal injury exemption, if your claim is over the amount allowed by the personal injury exception, you can apply the federal “wild card” exemption, which will allow you to exempt more.
- In some states, married couples may be able to double up on exemptions in bankruptcy.
- The fees and costs that you pay to your personal injury attorney do not count as part of the award when filing for bankruptcy.
Exemptions for Personal Injury Claims in a Bankruptcy
Depending on the circumstances, there may be some ways to save some of your personal injury award in Chapter 7 bankruptcy:
What About Money Already Spent Before Filing Bankruptcy?
Funds from a personal injury award or settlement received before filing and already spent may escape the trustee’s reach if the money was spent in the ordinary course of business over time (e.g., for living expenses, etc.). However, if the money was used to pay off favored creditors, transferred to a family member, or otherwise transferred in a suspicious way (particularly within a year of filing), the trustee may be able to claw back the payments from the recipients.
Contact an Experienced Chapter 7 Bankruptcy Lawyer
If you have questions regarding an Illinois Chapter 7 bankruptcy or Chapter 13 bankruptcy with regard to proceeds from a lawsuit, contact the Law Offices of Charles E. Covey for more information today.
