Filing for bankruptcy has many different legal implications. If you file for chapter 13 bankruptcy in the middle of a personal injury case, it can change things in one of two critical ways. Either anything won during the claim will become an asset of the bankruptcy estate or the settlement will become a source of income the bankruptcy court can use to pay off your debts. Before you file for Chapter 13 bankruptcy, consult with a personal injury lawyer about whether this is the right choice for you.
There are three different types of bankruptcy filings: Chapter 7, 13 and 11. Chapter 7 bankruptcy will lead to the liquidation of your assets. The bankruptcy court will have the right to liquidate everything you own and use the sale of your assets to pay off your debts. Chapter 13 bankruptcy – the most common type – is the reorganization of an individual’s finances. It looks at the filing party’s disposable income to repay debts. Chapter 11 is the same as Chapter 13, except that it applies to a business.
Declaring Chapter 13 bankruptcy means you do not have enough money to pay your debts and are requesting a reorganization of your finances. Filing for bankruptcy can clear you of all liability for debts you owe to creditors. Declaring bankruptcy comes with four key principles that can impact a personal injury case: assets, income, discharge of debt and automatic stay. The two that apply to your case will depend on whether you are the injured party – plaintiff – or the defendant.
When a plaintiff files for Chapter 13 bankruptcy, the courts examine his or her assets and disposable income. The courts create a bankruptcy estate, which holds all legal and equitable interests of the debtor. If the plaintiff receives financial compensation through a personal injury case, it will automatically belong to the bankruptcy estate. This means it will be legally separate from the plaintiff’s estate.
If a defendant files Chapter 13 bankruptcy, discharge of debt and automatic stay may come into effect instead. Discharge of debt means the defendant will no longer be financially liable for the debts listed – including a personal injury settlement or judgment award granted to a plaintiff. An automatic stay is an injunction that prevents creditors from seizing the defendant’s property.
If you declare Chapter 13 bankruptcy during a personal injury case, you lawfully must disclose the fact that you are involved in the case to the bankruptcy courts. You must list the injury claim on the bankruptcy filing as an asset if your injury claim arose before filing for bankruptcy. If you file a personal injury lawsuit after declaring bankruptcy, you must amend your Schedule B form to disclose the injury claim. Either way, the bankruptcy court must be informed about your injury lawsuit.
If you file for bankruptcy during a claim, the bankruptcy courts can use any proceeds from a settlement or jury verdict to pay off your debts. You may still be able to keep a portion of the settlement if you file for Chapter 7 bankruptcy, as up to $10,000 from a settlement is exempt from liquidation. With Chapter 13 bankruptcy, however, even the $10,000 exemption may be considered disposable income and used to pay off debts.
Filing Chapter 13 bankruptcy during a personal injury case may be necessary if you do not have enough income to pay for your bills and debts. Declaring Chapter 13 bankruptcy, however, can have a significant effect on your claim and ability to recover. Whether or not this is the right choice for you is something you and your personal injury lawyer in Houston can discuss in detail.