Personal injury claims appear often in bankruptcy cases and it is helpful to understand them from the debtor’s side in order to effectively deal with them when representing a creditor.
If the debtor is a defendant in a personal injury action, the assets are generally part of the bankruptcy estate. Specifically, if the injury and/or injury compensation occurred before the filing of the petition, the assets will be part of the estate. However, if injury occurred after the filing of the petition, the claim is generally not part of the estate unless the injury compensation occurs during the pendency of the bankruptcy; in which case the trustee will very likely seize the funds. If involved in a reorganization bankruptcy such as chapter 13, the obligation of good faith and fairness to one’s creditors may require a debtor to turn over some or all of the compensation to the Trustee.
Exemptions for personal injury claims can allow the individual debtor to keep all or part of the judgment amount. Pennsylvania and Federal exemptions are available, but debtors are generally advised in Pennsylvania to use Federal because they are higher. Using federal exemptions, there is an allowance of approximately $22,000 for personal injury claims and approximately $11,000 of wildcard exemption available. Wildcard exemptions allow debtors to exempt property that does not fit squarely within one of the existing exemption categories. Any amount over this approximately $33,000 will be distributed to the debtor’s creditors.
If the personal injury claim becomes part of the estate and has not reached the litigation phase, the Trustee will first demand payment from the individual or entity causing the debtor’s injury. If the claim is unliquidated at the time of filing, the Trustee may utilize an estimation proceeding to determine value. If payment is not received, the Trustee will determine if the claim is worth further pursuing through litigation, and proceed with litigation after filing for relief from stay if the claim is meritorious. Any money judgment obtained will become part of the estate and be distributed to the creditors. However, if the trustee determines that the claim is too difficult to prove, too expensive to pursue, or not likely to result in a significant award, he or she may abandon the claim back to the debtor.