Can the bankruptcy trustee take money I win in a personal injury lawsuit?

The trustee can take nonexempt portions of a personal injury lawsuit or claim to pay your creditors in bankruptcy. Learn more.

If you’re involved in a personal injury claim or lawsuit that results from an event that happened before you filed for bankruptcy, any money you might receive will be a part of the bankruptcy case—regardless of whether you filed the claim or lawsuit before or after bankruptcy.

It’s likely that you’ll be able to protect (exempt) at least some of the proceeds for yourself. If, however, you can’t claim the potential lawsuit recovery as exempt, the trustee will take the money you win in the personal injury lawsuit and pay your creditors in the bankruptcy.

Protecting Property With Bankruptcy Exemptions

You don’t lose everything you own when you file for bankruptcy. In both a Chapter 7 or a Chapter 13 case, you’ll be able to protect property that your state believes you’ll need for a fresh start.

For instance, state exemptions usually allow you to protect things such as:

  • some equity in a home and car
  • household belongings
  • clothing, and
  • your qualifying retirement account.

Some states allow you to choose either the state or federal exemption set—whichever will work best for you.

Exempting Your Personal Injury Award

The exemptions available for a personal injury recovery varies widely from state to state. There is also a federal exemption available for proceeds from personal injury lawsuits but, like most of the state exemptions, it’s for a limited amount.

You might have a wildcard exemption available to exempt additional portions of the proceeds. A wildcard exemption can be used on any property of your choosing.

For more information on exemptions, including how they work, see Bankruptcy Exemptions.

Listing the Lawsuit in Your Bankruptcy Papers

Even if you can claim the proceeds as exempt, you still must list the personal injury judgment, lawsuit, or claim (if the lawsuit has not been filed as of the date you file for bankruptcy) in your bankruptcy schedules. (To learn more about the bankruptcy schedules, see Completing the Bankruptcy Forms.)

How the Lawsuit or Claim Will Proceed

What will happen next will depend on the type of bankruptcy you file.

  • Chapter 7. If the lawsuit or claim amount is likely to be more than the amount you can exempt, the Chapter 7 trustee will take control of the claim or lawsuit and make decisions regarding how it should proceed. Once the trustee collects the money, the trustee will disburse the exempt portion to you and the remainder to your creditors. If funds still remain after paying all creditors in full, the trustee will return the remaining portion to you.
  • Chapter 13. In a Chapter 13 bankruptcy, you can pursue the claim on your own. However, when there is a recovery, you must amend (change) your plan (if it did not provide for full payment to all creditors) and turn over the nonexempt funds to your creditors.

Find information on the role of bankruptcy trustees and bankruptcy trustee fees.

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