Navigating a Personal Injury Claim Through the Chapter 13 Bankruptcy Process

by Gary on March 18, 2013

It is broadly accepted by most non-bankruptcy practitioners that bankruptcy lawyers are “a different breed,” and (similarly) that Bankruptcy Court is a “whole other ballgame” compared with “normal” litigation in state and federal courts. Consequently, it is common for personal injury attorneys to feel especially edgy about representing bankrupt debtors during active Chapter 13 cases, given the cocoon of bankruptcy statutes and rules that appears to envelop debtors while they are “in” a bankruptcy.

While these concerns are well-founded, and the healthy respect such non-bankruptcy lawyers accord the bankruptcy process is entirely due, a savvy P.I. lawyer need not abandon all hope of obtaining a good result for a would-be client simply due to the existence of a pending Chapter 13 bankruptcy. In this blog, we attempt to break down some of the steps that are necessary for the non-bankruptcy attorney to survive his/her Adventures in Bankruptcyland using a personal injury claim as an example. Note: not all pre-petition claims are equal under the law – personal injury claims, for example, are specifically provided-for in the Bankruptcy Code.

The First Step

If the personal injury claim arose prior to filing the bankruptcy case, the debtor must disclose the claim in his or her bankruptcy schedules that pre-bankruptcy P.I. claim. Every debtor’s bankruptcy is commenced by the filing of a bankruptcy “Petition,” and the Bankruptcy Code also requires that the debtor promptly file “schedules” listing detailed information about the debtor’s financial situation. These schedules include lists of the debtor’s real and personal property, a list of the applicable property exemptions (i.e. the stuff they get to keep / stuff a bankruptcy trustee cannot claim under either state or federal law), information about the debtor’s monthly income and expenses, lists of the debtor’s creditors (secured, priority unsecured, general unsecured), various statistical summaries, and other information required by the Bankruptcy Code.

Every bankruptcy debtor must elect either the Federal or State (Texas) exemption scheme when they file their schedules, and these exemptions provide lists of items which are protected by law from the debtor’s creditors (and the Chapter 13 Trustee) in bankruptcy. By properly exempting the pre-petition claim (or as much of it as the applicable exemptions will allow), the debtor will get to personally keep the maximum amount of the settlement or judgment proceeds once the case settles or is reduced to judgment. Note: the Texas exemptions do not provide for exemptions on Personal Injury claims. However, the Federal Exemptions do provide an allowance for pre-petition personal injury claims, see, e.g. 11 U.S.C. 522(d)(11)(D). The Federal Exemptions also provide for a “wildcard” exemption amount, which is cumulative with the P.I. exemption, see, e.g. 522(d)(5). In total the Federal Exemptions could allow your client to keep more than $30,000 of the personal injury settlement proceeds. However, this amount will vary depending on the debtor’s specific circumstances.

The Debtor and his or her bankruptcy counsel also need from you a complete list of any creditors – anyone who could have a claim — against the debtor or the proceeds of the lawsuit, including any medical bills, for example. Is the claim secured by a statutory lien? Have you issued a letter of protection? Let the debtor’s bankruptcy attorney know, as this information will also have to be disclosed.

The Second Step

Then, you have to get employed by the Bankruptcy Court as the debtor’s personal injury attorney. This is something the debtor’s bankruptcy attorney can handle for you, or you can handle yourself. If you fail to get approved for employment in a timely manner, you may not be able to collect any of your fees.

If the case settles, you must get your settlement approved by the Bankruptcy Court. The approval process is not difficult, but it may include a little coordination with the debtor’s bankruptcy attorney and some communication with the Chapter 13 Bankruptcy Trustee. It may be wise to engage the services of an experienced consumer bankruptcy attorney to shepherd you through the process your first time around, rather than jumping right in without a lifeline.

If the case goes to a successful verdict and you are able to collect the entire judgment on the debtor’s behalf and are now ready to begin disbursing the proceeds, you should now go to bankruptcy court to obtain approval of any expected disbursements prior to making them. Note that general unsecured creditors of the debtor may or may not get paid anything from the proceeds of the settlement.

You also want court approval of your attorneys’ fees. This is usually simple if you had your fee agreement approved properly when the bankruptcy court approved your employment.

The Third Step

Finally, once the bankrupcy court approves any settlement and issues its order directing how the proceeds of the settlement or judgment are to be disbursed, you may disburse settlement funds as directed. It is not unusual for some portion of the settlement proceeds that would otherwise go to creditors or to the debtor to be instead disbursed to the Chapter 13 Trustee for distribution.

Bankruptcy can be someone complex and opaque, but an experienced debtor’s counsel can help a personal injury attorney navigate through the process to a successful outcome.

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