Any personal injury claim or lawsuit that results from an event that took place before you filed for bankruptcy comes under the control of the bankruptcy trustee, whether or not the actual claim or lawsuit was filed before you filed for bankruptcy. If you cannot claim the potential lawsuit recovery as exempt, the trustee will take the money that you win in the personal injury lawsuit and pay your creditors in the bankruptcy.
The exemptions available for personal injury recoveries vary 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 is limited in amount. You may also be able to use an available wildcard exemption to exempt additional portions of the proceeds. You need to determine which exemptions are available to you in your location to find out how much you can claim as exempt.
For more information on exemptions, including how they work and what exemptions are available in your state, see our Bankruptcy Exemptions area.
Even if you are claiming 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.)
Chapter 7. If the lawsuit or claim is likely to bring in more than your exemption, the Chapter 7 trustee will take control of the claim or lawsuit. Once the trustee collects the money, the trustee will disburse the exempt portion to you and the remainder to your creditors. If there are still funds remaining after all of the creditors are paid in full, the trustee will give it 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 your plan (if it did not provide for full payment to all creditors) and turn over the nonexempt funds to your creditors.