Can I keep my personal injury award if I file for bankruptcy in California?

As a personal injury lawyer in California, one of the scenarios I see is people struggling financially after a serious car accident or other injury. Medical bills pile up and if the injury leaves the person unable to work even for a brief period of time, this can lead to debt issues. One possible solution is personal bankruptcy but, the question arises as to whether the person may keep all or part of the award from their personal injury claim if they file bankruptcy.

What are the two, normal types of consumer bankruptcy and how do they affect an award of money damages from an accident claim?

There are two, basic types of consumer bankruptcy for most individual filers. The first is a Chapter 7 case whereby the person in debt (debtor) asks the Bankruptcy Court to issue an order discharging most all debt that is not secured by collateral (e.g. credit card debt, medical bills, deficiency balances owed on surrendered vehicles, etc.). The second type of consumer bankruptcy is the Chapter 13 which asks the court to re-organize the debtor’s obligations (i.e. pay some debt back, reduce the amount for other debts and, sometimes, outright discharge certain types of debt).

Chapter 13 Treatment of Personal Injury Settlement: Because the debtor is agreeing to pay back certain claims through a payment plan structured by the court, a debtor is usually able to keep some or all proceeds received from an accident lawsuit in a Chapter 13 case. However, this depends upon a lot of factors including the amount agreed to be paid to unsecured creditors and other issues. For more information on reasons for Chapter 13 filing: Click Here [1]
Chapter 7 Bankruptcy Effect on An Accident Claim Judgment or Award: Because the Bankruptcy Court is allowing the debtor to completely discharge their obligations to most all unsecured creditors, the debtor in a Chapter 7 must claim “exemptions” to keep property. A personal injury award becomes the property of the debtor’s bankruptcy estate during the pendency of their case.

What is a debtor allowed to keep from an accident insurance claim award or settlement under Chapter 7 according to California law?

There are two, basic provisions of the California Code of Civil Procedure that provide for exemption of personal injury damages. Section 704.140 provides for fairly extensive exemption especially to the extent it is shown that the money awarded is “necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.” In addition, section 704.150 provides for exemption of a wrongful death claim award. Furthermore, section 703.140(b)(11) provides for exemption of wrongful death awards to the extent necessary to support the survivor’s family and dependents and personal injury awards up to a maximum of $24,060. The person filing bankruptcy must choose the “exemption scheme” (i.e. either section 703 or 704) which they intend to use. There are many legal reasons why a debtor would choose to exempt their award and under which provision of law.

Why is it important to retain both a competent personal injury attorney and a good consumer bankruptcy attorney if one is in overwhelming debt but, is trying to keep an award of money for an injury?

The laws of exemptions are complicated for the average lay person to understand. The role of the personal injury lawyer is to try to obtain maximum compensation for the injury. However, if the injured person is contemplating bankruptcy, it is important that the injured party retain competent bankruptcy counsel and that the bankruptcy lawyer and the personal injury lawyer coordinate and communicate to ensure the greatest potential that the injured party will be able to eliminate their debts and still retain some or all of the award for their pain and suffering and other damages related to the injury claim.

Steven M. Sweat [2] is a California injury lawyer