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.
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 states allow you to choose either the state or federal exemption set—whichever will work best for you.
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.
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.)
What will happen next will depend on the type of bankruptcy you file.