Answer: It depends.
In a Chapter 7 bankruptcy case, the Debtor (the one filing bankruptcy) is allowed to keep any assets that are legally exempt from the claims of creditors. The job of the Chapter 7 Trustee in the case is to determine if the Debtor has any “non-exempt” assets. If so, the Trustee gathers those assets and sells them. From the proceeds of the sale the Trustee is entitled to take a fee for administering the assets, then the Trustee distributes the remaining funds to the unsecured creditors who file timely claims in the case.
In a Chapter 7 bankruptcy case where there exists a potential personal injury case, such as an automobile injury case or a slip and fall case, the Trustee “steps into the shoes” of the Debtor(s) filing the case and becomes the owner of the personal cause of action. Usually the Chapter 7 Trustee will terminate the services of any lawyer who may be representing the Debtor in the personal injury case and replace that personal injury lawyer with a personal injury lawyer of his or her own choosing who is familiar with the bankruptcy process and reporting to the Bankruptcy Court. In rare instances, where the personal injury matter has been sufficiently litigated and settlement or trial is imminent, the Chapter 7 Trustee may keep the original personal injury attorney hired by the Debtor. The Debtor is required to cooperate with the Trustee and Trustee’s counsel, if any, in the prosecution of the personal injury case. Should the Debtor fail to cooperate, the Court may lead to a revoke (take back) the Debtor’s Discharge of Debts. Obviously, a competent bankruptcy attorney should be consulted prior to filing a Chapter 7 bankruptcy case in the event that the Debtor(s) has a potential personal injury claim at the time of the filing of the bankruptcy petition.
In a Chapter 13 bankruptcy case, the Trustee’s primary role is to make sure that the unsecured creditors receive funds in an amount which are at least what the unsecured creditors would receive in a Chapter 7 case if a Chapter 7 case had been filed instead.
In a Chapter 13 bankruptcy case the net proceeds of a potential personal injury case are deemed under bankruptcy law to be “Disposable Income” and they must be provided to the Trustee for distribution to creditors. However, as a practical matter, the Bankruptcy Court normally will allow a Debtor to retain 50% of the net proceeds of any settlement/jury award. The reason for this is that it provides the Debtor with an incentive to continue to be treated by the physicians, and thereby theoretically, enhances the chances of recovery overall along with the potential amount paid to the unsecured creditors who file timely claims.
The 50% division of any personal injury recovery is not etched in stone however. In some personal injury cases the injuries are so severe, or so long lasting, that future surgeries, physical rehabilitation and prescription medications will be needed into the future. In these situations, the Debtor’s attorney should work with the Debtor to gather good faith estimates as to the costs of future surgeries, future rehabilitation and prescription medications going forward. Those estimates should then be provided to the Chapter 13 Trustee for review. Often the Chapter 13 Trustee will agree to a greater than 50% share for the Debtor based on the information provided. The Chapter 13 Trustee is generally very understanding and agreeable as long as they receive the appropriate documentation to justify a greater than 50/50 split of the net proceeds. Additionally, in Chapter 13 cases involving a potential personal injury case, the Debtor can usually retain the same personal injury attorney they originally hired and who has been working on the case. The Debtor’s attorney will need to assist in having the personal injury attorney approved by the Bankruptcy Court to continue to represent the Debtor in the personal injury case. Failure to do so may result in the personal injury attorney handling the case and not being paid for his/her legal services at the conclusion of the personal injury case. It is important to note that no settlement or jury award may be distributed to the parties until after the Bankruptcy Court approves it.
Similar to a Debtor in a Chapter 7 bankruptcy case having a potential personal injury case being involved, a Debtor in a Chapter 13 bankruptcy case can claim as exempt any personal property (which a personal injury matter is) amount that is leftover after exempting out the Debtor’s other assets.
If you have any questions or desire more information as to how a Chapter 7 case or a Chapter 13 case may affect a potential personal injury claim/case that you may have or to schedule a free initial consultation to discuss how I may be able to help you, call Randall C. Hiepe, Esquire at (727) 898-2700 (Pinellas County) or (863) 802-4700 (Polk County).