How A Personal Injury Settlement Is Affected By Your Bankruptcy Case

Posted on: 11 February 2016

Personal injury settlements become part of your bankruptcy in a couple of ways. The settlement can be added to your bankruptcy estate or it could be added to your personal assets. How the settlement will be handled to pay off your creditors will be determined by the trustee of the bankruptcy estate and the type of bankruptcy protection chapter you filed. Here is how a bankruptcy estate works and how the type of bankruptcy chapter you filed affects your settlement.

Bankruptcy Estate

When you file for bankruptcy, you have to give a full accounting of your current and future assets — including any possible personal injury lawsuit settlements you may receive in the future. The courts order that your assets be placed into one of two categories: exempt or non-exempt. Your exempt assets will not be part of your bankruptcy, but your non-exempt assets will be. Among the non-exempt assets are all or most of the funds from person injury settlements. For example, Illinois allows you to keep up $7,500 on a personal injury settlement when you declare bankruptcy. The trustee is in charge of taking these assets and using them to pay off your creditors. 

How the trustee will use the personal injury funds will depend on whether you have filed for a chapter 7 or 13 bankruptcy. Here is how the different filings affect you and your creditors.

Chapter 7 Bankruptcy

Filing for a chapter 7 bankruptcy means you are allowing the trustee managing your bankruptcy estate to make sure your creditors are paid back with the assets you have on hand that can be claimed or sold and expect to have in the future. The trustees can't touch some personal injury settlements by law. For example, some states exempt the bankruptcy trustee from touching Worker's Compensation settlements and payments to pay back debts, but they can use person injury settlements from an insurance company, business, or person to pay off the creditors regardless of how it affects you personally.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy isn't as draconian as chapter 7 bankruptcy. In a chapter 13 bankruptcy, the trustee tries to work out a payment arrangement that is beneficial to both you and your debtors. The trustee will work out a payment arrangement schedule that allows you to keep your assets as long as you make the agreed upon payments on time and in the full amount. The personal injury settlement may cause you to make larger payments than original agreed, because the value of your assets has now grown. However, the settlement will be yours to use for your own personal benefit, too (again, as long as you make your scheduled payments as agreed).

Contact an attorney like John D Rouse for more information. 

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