Handling a personal injury case can be challenging, especially when bankruptcy is involved. In California, if someone declares bankruptcy at any stage of a personal injury lawsuit, it can change how the case turns out. Sometimes, defendants may use bankruptcy to avoid paying, while plaintiffs might risk losing compensation.
California considers a personal injury lawsuit an “asset” in bankruptcy, meaning the defendant and plaintiff in the bankruptcy filing must disclose their assets and debts with the Court. Not listing a personal injury claim, even if a lawsuit has not been filed yet, or failing to inform the bankruptcy attorney about it can lead to penalties from the court. Knowing how to navigate these cases can help you make better decisions about bankruptcy. This blog discusses the impact of bankruptcy proceedings on personal injury claims.
Bankrupt Defendants in Personal Injury Claims
Personal injury claims are usually made against insurance companies to recover damages, but they can also include the following defendants:
- Individuals
- Small businesses
- Partners in partnerships
- Sole proprietors
- Other corporations or organizations
A defendant is anyone believed to be responsible for a victim’s injuries and losses. Be cautious if you have a personal injury case and are considering bankruptcy to avoid paying a settlement or jury award. Committing bankruptcy fraud is a serious federal crime resulting in hefty fines and jail time.
Roles of Insurance Companies in Personal Injury Cases
Insurance companies serve as middlemen between victims and insurance policyholders in personal injury cases. Their main functions include:
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Offers Financial Support
Insurance plays a crucial role in personal injury cases by providing financial help. After an accident, expenses such as medical bills, treatment, and lost wages can rise rapidly. Personal injury protection insurance assists in covering these costs and keeping your finances safe.
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Simplifying the Claims Process
Insurance companies are essential for making claims easier. They manage the paperwork, investigate claims, and negotiate settlements. This support is crucial for people recovering from injuries since they might have a hard time dealing with the complexities of personal injury claims.
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Legal Assistance and Support
Many insurance plans provide access to legal assistance, which can be invaluable when navigating the legal aspects of a personal injury case. Insurance company lawyers can offer guidance, represent you in court, and negotiate settlements. A knowledgeable bankruptcy attorney's counsel can significantly affect your case's outcome.
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Damage Coverage
Insurance policies are designed to protect against different kinds of damages, like:
- Financial Damages—These damages cover medical bills, lost income, and other immediate expenses.
- Emotional Damages—This encompasses pain and suffering, mental anguish, and loss of enjoyment in life.
- Punitive Damages—In some cases, insurance may also cover punitive damages to penalize the liable party for egregious behavior.
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Risk Management
Insurance serves as a tool for managing risk. In this case, individuals transfer the financial responsibility of accidents to the insurance company by paying premiums. This action helps reduce the financial burden of a serious incident. Insurance coverage secures your financial standing by spreading the risk of accidents among a larger group.
Bankrupt Plaintiffs in Personal Injury Claims
A different case is when the plaintiff files for bankruptcy in a personal injury case. In California, filing for bankruptcy during your personal injury lawsuit can change your ability to obtain compensation from the defendant.
Once you file, the defendant can ask for a summary judgment. A summary judgment motion is the defendant's legal request in a civil case once a lawsuit is underway. The defense often relies on this motion to state that there is no case for a jury or fact-finder to decide.
This judgment indicates that the defendant will no longer be the leading party in the lawsuit. Your case will then be transferred to the Bankruptcy Court, where a trustee will oversee your bankruptcy estate.
Your trustee will handle the lawsuit if you declare bankruptcy while a personal injury case is ongoing. You will no longer have the power to choose whether to settle with an insurance company or go to trial. Your trustee will make these decisions with the bankruptcy court’s approval.
Compensation from a jury award or personal injury settlements can affect your bankruptcy case because the court considers them assets. These funds could be used to pay your creditors during bankruptcy.
Even if you have not filed a personal injury case but believe you might, this is still considered a valuable asset in bankruptcy. According to 11 United States Code § 101(5), a claim is defined as a right to payment, regardless of status.
You should disclose any potential personal injury claims when filing for Chapter 13 or Chapter 7 bankruptcy. The type and timing of filing bankruptcy are crucial for those seeking a new beginning.
What Happens When Defendants Declare Bankruptcy?
In California, bankruptcy can free a debtor from paying the injured person for damages they caused. This outcome depends on various factors, with the key ones being:
- The timing of the bankruptcy filing
- The specific type of bankruptcy filed
Filing Before a Personal Injury Claim
If an accused in a personal injury claim believes they might be responsible for damages, or if they do not have insurance or the policy does not cover all damages, they might be held accountable for the costs and must pay from their pocket. This situation can lead to financial hardships, and they might choose to declare bankruptcy to evade paying or put financial strain on them. Individuals can file for Chapter 7 or Chapter 13 bankruptcy, whereas businesses may file for Chapter 7 or Chapter 11.
The goal of Chapter 7 bankruptcy is to sell off assets to eliminate debts. In comparison, Chapter 13 bankruptcy seeks to lessen certain debts and provides a plan for repayment over time. Debtors must always disclose all their debts and assets in either case.
Filing triggers an automatic stay, a legal protection that stops debt collectors from seizing the defendant’s property or taking legal steps like placing liens. The automatic stay is designed to safeguard the debtor’s assets from creditors.
When the automatic stay is in place, a creditor cannot initiate legal proceedings, trials, or enforce judgments against the defendant. However, there are some limitations on automatic stays. Plaintiffs might be able to continue with the bankruptcy claim if it aligns with the Bankruptcy Code’s requirements. They must submit a motion to the bankruptcy court to seek relief from the automatic stay.
In their motion, they will describe the legal basis for their request to lift the automatic stay and attach relevant documents to support their argument. If the Bankruptcy Court rules in the plaintiff’s favor, you will be responsible for their losses. If the court cancels all your debts, you may not be able to receive compensation anymore. You might need to end the claim or ask your lawyer to look for other people who could be liable for the damages.
However, the plaintiff might file a lawsuit after bankruptcy, which relies on the timeline. These deadlines are known as the statute of limitations. The longer the plaintiff waits to submit a claim, the higher the chance that the statute of limitations will expire. Chapter 7 bankruptcy is usually resolved quickly, while Chapter 13 takes 3 to 5 years to complete.
The statute of limitations generally ranges from 1 to 3 years, but this can vary depending on the type of personal injury lawsuit and the jurisdiction involved.
Filing During Personal Injury Cases
An automatic stay usually stops the lawsuit if an accused declares bankruptcy during a personal injury lawsuit. When a debtor declares bankruptcy, the bankruptcy court issues this automatic stay, which halts all civil lawsuits against the debtor, including personal injury claims.
In some cases, the plaintiff can request to lift the automatic stay. This can happen in two main situations:
- The plaintiff proves that the accused declared bankruptcy to avoid the personal injury lawsuit
- The plaintiff shows that the defendant’s insurance covers the damages they seek.
Filing After a Personal Injury Claim
If the defendant does not have insurance or inadequate coverage, any damages granted in the personal injury lawsuit turn into unsecured debts in Chapter 13 or Chapter 7 bankruptcy declared after the injury claim.
Depending on how the debt is reorganized, companies that file for Chapter 11 might also avoid paying their lenders, including those who have won or settled a case against them.
In Chapters 11, 13, and 7 of the bankruptcy code, the borrower may be released from the obligation to settle damages. However, there are some cases where damages from personal injury cannot be eliminated.
Can Personal Injury Debts Be Excluded from Discharge?
If defendants file for bankruptcy, their debts are usually wiped out, meaning they no longer have to pay them. However, certain debts could be excluded from this discharge, especially in personal injury claims:
- DUI-related injuries. If a person causes death or injury while driving under the influence, those damages cannot be discharged in Chapter 7, 11, or 13 bankruptcy.
- Malicious or intentional harm. If the defendant acted willfully or maliciously, the plaintiff could challenge the discharge of debts linked to the settlement. The court will determine if the debt should be excluded.
If the complainant has won their personal injury lawsuit and the accused declares bankruptcy, they may ask the court to withdraw the automatic stay. This withdrawal can work in specific situations, such as when the court orders equitable liens or constructive trust. These options are not common but help ensure the complainant receives payment.
Does It Make a Difference If a Plaintiff’s Injury Happened Before or After They Filed For Bankruptcy?
Your injury's timing and bankruptcy filing are essential for your personal injury claim.
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You Were Hurt Before You Filed for Chapter 7 Bankruptcy
If you were injured before you filed for Chapter 7 bankruptcy, your personal injury settlement might be included in your bankruptcy estate. This means the trustee appointed by the court could manage the funds, which might be used to settle your debts.
However, California law under California Code of Civil Procedure § 703.140(b)(5) provides a wildcard exemption that could apply to your personal injury claim, possibly safeguarding some or all of your settlement from creditors, depending on the exemption limit. Any part of the settlement that is not protected would then be used to pay your creditors.
This exemption does not cover payments for lost income, medical expenses, or other damages. You should consult a lawyer about bankruptcy and personal injury law for ideal guidance.
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You Were Injured After Filing Chapter 7 Bankruptcy
If you were injured after filing for Chapter 7 bankruptcy, your personal injury settlement will not be part of your bankruptcy estate. This means you can keep the settlement money, unlike injuries that happen before filing for bankruptcy.
There may be exceptions, depending on the situation. The court will determine how to handle the settlement by considering the nature and seriousness of your injuries and when they happened. Therefore, you should talk to a lawyer who understands both bankruptcy and personal injury law in California to help you understand your financial and legal options.
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You Were Hurt Before Filing Chapter 13 Bankruptcy
If you suffered an injury before filing for Chapter 13 bankruptcy, your personal injury settlement is included in your bankruptcy estate. However, you can still control the claim and settlement since Chapter 13 allows you to keep your assets. The funds from the settlement will be included in your repayment plan, which could lead to a higher amount owed to your creditors.
Specific exemptions safeguard your personal injury claim and settlement, helping minimize the impact of your repayment plan. Any money received for lost income, medical bills, or other damages may be treated differently and could still be used to settle debts with creditors.
Since these issues can significantly affect your finances and personal life, you should consult a qualified lawyer who knows bankruptcy and personal injury laws. They can assist you in handling these complicated legal matters.
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You Were Hurt After Filing Chapter 13 Bankruptcy
If you were hurt after you filed for Chapter 13 bankruptcy, your personal injury settlement usually does not become part of your bankruptcy estate. This case allows you to manage the settlement funds. However, the court may consider how much the settlement affects your ability to pay creditors. If it dramatically increases your disposable income, it might lead to a change in your repayment plan.
Be aware that the timing of your injury and the details of your case can impact how your settlement is managed in bankruptcy.
Obligation to Disclose a Personal Injury Claim in Chapter 13 and Chapter 7 Bankruptcies
In bankruptcy cases, personal injury claims and their damages are treated as assets and must be reported. This rule applies to Chapter 7, where assets are liquidated to pay off debts, and Chapter 13, which enables individuals and partners to create a repayment plan.
However, if a personal injury occurs after filing for Chapter 7, the claimant does not have to report that case. Not disclosing a personal injury settlement during bankruptcy can lead to serious issues, such as losing the right to recover damages or facing criminal charges for deliberate non-disclosure.
Are Mass Tort Claims Unique Different From Personal Injury Cases?
Mass tort bankruptcy cases stand out from regular bankruptcy for a few reasons. First, the defendants are often large, global companies with substantial wealth and assets. Many of these companies can afford to settle with injury victims. Some may file for bankruptcy to reduce their payout, but if the courts notice this tactic, they will dismiss the bankruptcy as improperly filed.
Due to the high number of injury victims in mass torts, skilled lawyers team with the courts to help you file your claim. After that, you may need to take further steps, such as providing proof of your injuries or claim.
Next, the lawyers for the victims will negotiate with the defendant to create a comprehensive settlement for all claims. Usually, the defendant posts money to a victim compensation fund. Victims can use this fund for their settlements. If you agree to the settlement, you will sign a release and receive your payment. You can resolve the matter independently if the offer does not satisfy you.
Courts can occasionally refuse to let a defendant use bankruptcy for mass tort claims. If the court believes the defendant misuses bankruptcy to dodge victim payments, it can dismiss the bankruptcy case. This case compels the defendant to return with a more reasonable settlement offer than the one previously rejected.
Find a Bankruptcy Law Firm Near Me
In California, personal injury lawsuits aim to help those hurt receive compensation, whereas bankruptcy helps those struggling with debt. If these two collide, you should be aware of your rights and consider seeking help from a bankruptcy lawyer. A bankruptcy attorney can guide you through the legal challenges and help you find the ideal solution.
We at the Los Angeles Bankruptcy Attorney are ready to support you throughout your bankruptcy process. Call our law office today at 424-285-5525 to schedule a consultation on how we can help you.
