If I File for Chapter 7 Bankruptcy, will I Still Get to Keep the Award from my Personal Injury Lawsuit?

It is not unusual for an individual to have a bankruptcy case and a personal injury lawsuit going at the same time. Often this occurs because the expenses of medical care and the loss of wages during injury recovery or because of a new disability wreak havoc on a person’s finances and force them into bankruptcy before the personal injury case is resolved and any settlement or judgment is awarded.

So what happens in these cases? Does the debtor get to keep the personal injury award once debts are discharged in a bankruptcy? As a Maryland bankruptcy lawyer, I get asked questions like this fairly regularly.

When someone files for Chapter 7 bankruptcy in Maryland, the state’s exemptions laws exempt some assets from liquidation, which means the debtor gets to keep them. By strategically combining several of these exemptions, a bankruptcy debtor with a personal injury lawsuit may be able to keep most, or, if the award is small enough, all of the personal injury award. If the award is for “pain and suffering,” the debtor will be able to keep all of the award irrespective of the amount. Federal bankruptcy law also allows similar, but slightly different exemptions. However, federal bankruptcy exemptions are not applicable in Maryland.

Chapter 7 Bankruptcy Exemptions Applicable to Personal Injury Awards

The first exemption to be aware of is the state’s exemption of all awards for pain and suffering, known as “general damages,” and for future lost wages. All personal injury monies awarded as compensation for pain and suffering and future lost wages are exempt from Chapter 7 bankruptcy liquidation and the debtor may keep all those monies – no matter how much is awarded.

Here’s the catch, though. The money must specifically be labeled as being for these purposes in the court’s findings or the settlement agreement. Any monies awarded that are not specifically labeled as an award for pain and suffering or future lost wages, the bankruptcy trustee will assume are for compensation of medical bills, past lost wages and other economic losses, known as “special damages.” These are not exempted from Chapter 7 bankruptcy and will become part of the bankruptcy estate to pay creditors. This makes it extremely important that a debtor’s bankruptcy attorney and personal injury attorney work together to ensure that pain-and-suffering awards and future-lost-wages awards are clearly labeled in court findings or a settlement agreement.

Besides general damages, personal injury awards also include awards for “specific damages.” Specific damages include medical bills, lost wages, cost for replacement services, lost earning potential, and other economic losses with a specific actual or estimated dollar value. Awards for specific damages are not exempt from Chapter 7 bankruptcy in Maryland because the award amount is intended to cover the respective losses, which most likely contributed to the need to file bankruptcy. However, there are other exemptions that can be taken advantage of to preserve some of this money for the debtor.

First of all, if the personal injury case is still pending and the award for specific damages is likely to be small (less than $15,000) , it is possible the bankruptcy trustee will determine that the award is of inconsequential value to the bankruptcy estate and abandon the estate’s interest in the potential personal injury award. If this happens, the bankruptcy will move forward without the personal injury award and the debtor can keep the entire award.

For cases in which the trustee does not abandon interest in the personal injury case, debtors may still retain a portion of the personal injury award. In Maryland, bankruptcy debtors may exempt up to $6,000 in cash or property of any sort. If any portion of this has not been applied toward other assets, it may be applied toward the personal injury award. If you’ve already chosen to exempt $6,000 in savings or applied it toward your residence, for example, it will not be available to apply toward the personal injury award. However, if you only had $3,000 in savings to exempt, for example, and are renting your home, then you could exempt $3,000 of the personal injury award.

Get help determining how much of your personal injury award you can keep in bankruptcy

If you are facing circumstances in which you have a pending personal injury case and may need to file for bankruptcy, you can get help determining how much of your personal injury award you are likely to keep and get help in determining whether bankruptcy is the right course of action for you by calling Maryland bankruptcy attorney John Burns. We may even be able to recommend solutions other than bankruptcy, which will enable you to keep more of your personal injury award. Call our Maryland bankruptcy law office at 301-441-8780 to schedule an appointment.