Posted: April 15, 2020
The main underlying cause of some Chapter 7 bankruptcy cases is the occurrence of a personal injury to that person from an accident, which prevents full time employment as a result of the injuries, as well as increased use of credit cards to pay for monthly living expenses. Typically, that debtor has commenced a pre-bankruptcy personal injury law suit to recover money damages from the negligent defendant, or, possesses the right to bring the action (chose in action), but has not yet done so. The question then is how that law suit is treated in the Chapter 7 bankruptcy. The proceeds of the lawsuit are property of the bankruptcy estate, which means that they are recoverable by the Trustee for distribution to creditors. The debtor, however, may assert exemptions of a certain portion of the law suit to ensure receipt of some of the money.
When a person files for Chapter 7 bankruptcy, a bankruptcy estate is created, that includes all pre-petition assets that a debtor owns; the scope of the law is intentionally very broad, to include as many “assets” as possible. Bankruptcy Code Section 541(a)(1). Pre-petition assets may be recovered by a Chapter 7 Trustee to pay your pre-petition creditors. Law suits, whether already commenced or possessing the right to bring a law suit, are absolutely property of the bankruptcy estate. Any Chapter 7 Trustee will immediately move to retain the personal injury counsel as the Trustee’s counsel and the Chapter 7 Trustee will be the only person who has authority to settle the personal injury action.
Extreme care must be exercised by the debtor to reveal the existence of the law suit, or right to bring it, in the bankruptcy petition. The failure to reveal the asset could result in the Court issuing an Order that the Debtor is not entitled to a discharge and not entitled to any exemptions. Or, more simply put, you will lose any right to receive money from the law suit and you will still owe all of your creditors all of the money you originally owed them, defeating the whole purpose of filing for Chapter 7 in the first place.
Just because the law suit is property of the bankruptcy estate does not mean, however, that the injured debtor is not still entitled to recover some of the ultimate money award. The debtor has the statutory right to assert exemptions, either federal or state, which protect and insulate assets from a Chapter 7 Trustee, and hence those funds are not available for distribution to creditors. An allowed exemption is the right of a debtor to intentionally require a Chapter 7 Trustee to pay them an amount equal to the allowed exemption if the trustee sells the asset. For example, if a debtor asserts a $1,000.00 exemption on household furniture, then, if the Trustee sells the furniture, the first $1,000.00 must go to the debtor, which typically discourages greatly those type of sales.
In the case of personal injury exemptions, under Bankruptcy Code Section 522(d)(5) , a debtor is entitled to assert a “wild card” exemption on any asset they want. The wild card exemption is equal to $1,325.00, plus any unused portion of a homestead exemption not to exceed $12,575.00. Thus, if you do not need to protect equity in your residence, the total wild card exemption you can assert is $13,900.00. Furthermore, under Bankruptcy Code Section 522(d)(11), a debtor is entitled to assert a personal injury exemption in the amount of $25,150.00. As a result, a debtor can exempt $39,050.00 of a personal injury action, which amount must be paid to the debtor before any other creditor of the bankruptcy estate.
Finally, it must be noted that debtors are entitled to the recovery of any surplus money from a bankruptcy estate. This means is that if the personal injury award is larger than the total debt owed by the bankruptcy estate, once all creditors are paid, the debtor is entitled to receive all the rest of the surplus money.
Bankruptcy is a very complex legal process, with significant benefits for those people in need of its protection. It is critical that you consult with an experienced bankruptcy lawyer to go over all of your options and to understand your rights. Kirschenbaum & Kirschenbaum has over 45 years’ experience in dealing with all bankruptcy matters. Please contact one of our attorneys today.
For assistance with all Bankruptcy matters, please contact us:
Ken Kirschenbaum, Esq. (516)-747-6700 Ext. 301 or
Stacy Spector, Esq. (516)-747-6700 Ext. 304 or