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

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.

You'll likely be able to protect (exempt) some of the proceeds. If 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 can protect property 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 the state or federal exemption set, whichever works best for you.

Personal Injury Settlement Exemption

The exemptions available for personal injury recovery vary widely from state to state. A federal bankruptcy exemption is also available for proceeds from personal injury lawsuits, but like most state exemptions, it's for a limited amount.

You might have a wildcard exemption 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.

Personal Injury Settlement After Filing Chapter 7 Bankruptcy

It doesn't matter whether you collect the funds before or after filing for bankruptcy. The key date is when the injury occurred. If the injury occurred before filing for bankruptcy, any settlement must be disclosed in Chapter 7, and you must be able to protect the settlement amount with an exemption to keep it. An injury that occurred after filing for Chapter 7 bankruptcy won't be part of the bankruptcy case.

Listing the Lawsuit in Your Bankruptcy Papers

Even if you can claim the proceeds as exempt, you must still list the personal injury judgment, lawsuit, or claim if the lawsuit has not been filed as 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 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 independently. However, when there is a recovery, you must amend (change) your plan (if it did not provide 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.