There are occasions when a personal injury claim is pending and the injured party files for bankruptcy during the course of representation. It is essential that a bankruptcy filing be brought to the attention of your injury lawyer immediately, as it will have a significant impact on the handling of your injury claim.
The client should not file a Chapter 7 bankruptcy unless they are willing to give up the claim entirely, including any entitlement to payment of future medical expenses, which is explained in more detail below. Failure to disclose a pending personal injury claim in your bankruptcy filing is a criminal offense known as bankruptcy fraud.
There are two "Chapters of the Bankruptcy Code (Title ii U.S.C.) under which individuals usually seek relief. Below a summary of their impact on personal injury claims. This is an overview and is not specific legal advice for any case or client.
In Chapter 7 bankruptcy cases, unless the cause of action is exempt under law such as a Worker's Compensation claim, upon commencement of the case the cause of action is given over to the bankruptcy trustee as the representative of the creditors. The injured plaintiff may remain injured, but he or she is no longer the proper party plaintiff. The real party in interest is the bankruptcy trustee acting on behalf of the "bankruptcy estate", who has complete authority to pursue the litigation and negotiate settlements. Any settlement is subject to the bankruptcy judges approval, which is rarely withheld. The original injured plaintiff has no standing to object to any settlement unless they can convince the judge that there should be sufficient recovery to pay all creditors in full, with some surplus repayable to the injured original plaintiff (a difficult burden to prove).
This means that creditors must get paid in full, including such unusual debts as deficiencies on foreclosed real estate. If there is not a surplus beyond all debt, the injured party has no standing to participate in the settlement process, nor to object to the amount of the settlement. The trustees have very little incentive to push for maximum recovery, they are only liquidators.
An additional complication when a Chapter 7 bankruptcy case is filed is that the medical expenses incurred after the filing of the bankruptcy are not dischargeable in the bankruptcy case. Bankruptcy only discharges debts in existence when the case is commenced. While those medical expenses will be an administrative expense of the bankruptcy estate to be paid out of any settlement as necessary to support and prove the claim, the bankruptcy trustee will be attempting to minimize payment to all medical providers in order to maximize payment to pre-petition creditors who are the beneficiaries of the bankruptcy estate. He has no incentive to negotiate a release of personal liability to the injured - just to settle claims against his estate as cheaply as possible. Insurance defense attorneys are trained to do bankruptcy checks because if the injured party filed bankruptcy and didn't disclose the cause of action, the defense attorney can move for dismissal on the day of trial for improper party plaintiff often after the statute has run for refiling - Since it is too late for the bankruptcy trustee to refile, his only recourse is to sue the debtor for non-disclosure, move to revoke has discharge, and possibly refer the case to the F.B.I. for criminal charges for bankruptcy fraud.
Chapter 13 is considered the" wage earner's reorganization" and is available only to human beings, not corporations. (There are three other reorganizations: generally Chapter 9 is for government units: Chapter II is for corporations or individuals with extraordinarily large debts, usually engaged In business; Chapter 12 is for family farmers or family fishermen with regular annual income.)
If a client has an actionable personal injury claim but they are in collection or being sued by creditors, a Chapter 13 bankruptcy case is ordinarily the best solution. The client is protected by the "automatic stay" of bankruptcy from all collection actions. Instead of the cause or action being turned over to a trustee, as it is in Chapter 7, the Chapter 13 debtor chooses and retains counsel and through the bankruptcy attorney, that counsel is approved by the bankruptcy court to represent both the interests of the debtor and of the bankruptcy estate/Chapter 13 trustee.
Once personal injury counsel has been approved by the bankruptcy court the case proceeds normally, with day to day litigation decisions generally being made by the client and personal injury counsel. Day-to-day litigation decisions should be made by the debtor and litigation counsel and it does not normally require that a motion for court approval of litigation actions be made until a proposed settlement has been reached. When the client and personal injury counsel agree that a binding offer should be accepted. that acceptance must be expressly subject to bankruptcy court approval. (a motion for approval of the settlement). Normally at the same time a motion to approve the fees of personal injury counsel is also filed. It is very unusual for the judge to deny either motion. Bankruptcy judges do not want to discourage personal injury counsel from representing debtors in bankruptcy and generally approve the contingency contract and costs as agreed and incurred unless the bankruptcy judge finds those to be unfair under the factual circumstances. At the time personal injury counsel is authorized by the bankruptcy judge to represent the debtor and the bankruptcy estate, the order normally says that personal injury counsel's fees and costs shall be such as the bankruptcy court shall determine. Fees and costs awarded are always within the discretion of the bankruptcy judge. Upon separate motion the Bankruptcy Court will determine distribution of the rest of the proceeds between the debtor and the bankruptcy estate.