I received a large settlement in a personal injury case. Will I lose it in Chapter 7 bankruptcy?

Whether you can keep your personal injury settlement award in Chapter 7 bankruptcy depends on state law.

Question

Last year I was standing in the customer service area in the local hardware store when a large roll of tarpaper propped against the counter fell and broke my ankle. Since I’m a grocery clerk, I couldn’t work and the bills stacked up fast.

I want to file for Chapter 7 bankruptcy, but I just settled my injury case with the hardware store for $75,000. Will I have to give up the settlement money if I file for bankruptcy?

Answer

Part of filing for bankruptcy is being bankrupt. That said, it depends on the laws of your state.

Since the injury occurred before you filed for bankruptcy, your $75,000 settlement is an asset of the bankruptcy estate. Even though you don’t have to give up all of your assets when you file, the amount you can keep (exempt) will depend on state law.

Keeping Property in Chapter 7 Bankruptcy

Most people file for Chapter 7 bankruptcy rather than Chapter 13 if it wipes out most or all of their debt. In exchange for a debt discharge, the bankruptcy trustee will sell the property you can’t exempt—your nonexempt assets—and use the proceeds to distribute to your creditors.

You don't have to give up everything, however. State and federal laws (called exemption laws) allow you to keep certain property. The idea is to make sure you have enough basics to make a fresh start.

You Must Disclose all Property in Your Bankruptcy Papers

Everything you own must be listed on the proper schedule in the bankruptcy petition you file with the court, including funds received to settle a lawsuit.

If you don’t disclose the settlement, you could suffer significant consequences, such as not receiving your discharge. You could even be charged with fraud, and, if convicted, you could face fines, jail time, or both.

Settlement Money Is a Type of Property

Whether it is a settlement, an arbitration award, or a trial judgment, all the money you receive to compensate you for an injury is part of the property in your bankruptcy estate. You’ll include money from personal injury lawsuits, such as:

  • automobile accidents
  • dog bites
  • slip and falls, and
  • product liability cases.

It also includes money you receive from other types of cases, for instance, contract disputes, real estate lawsuits, and discrimination cases.

You Might Be Able to Exempt Your Settlement

Each state has its own set of exemption laws. And some states allow you to use the federal bankruptcy exemptions instead of state exemptions.

Either way, if the money you received in your personal injury settlement is exempt under your state exemption laws, then you can keep it in Chapter 7 bankruptcy.

Here’s how it works.

  • Personal injury lawsuit exemptions. While some states allow you to exempt all the proceeds from a personal injury case, some allow you to do so only if the settlement is from a wrongful death action. Other states limit your exemption to the amount of money you’ll need to support yourself and your family, regardless of the type of case.
  • Protect settlement funds with a wildcard exemption. If your state has a wildcard exemption, you can exempt any type of property you choose, but there’s a limit on the dollar amount. This exemption works well for smaller settlement awards, but might not be enough to protect your entire settlement if it's large. For example, if your state’s wildcard exemption amount is $25,000, then you'd get to keep $25,000 of your $75,000 settlement. The remaining $50,000 would be used to pay your creditors.
  • Federal bankruptcy exemptions for lawsuit awards. In some states, you can choose between your state’s exemptions and the federal exemptions depending on which set works better for you. Those states are Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

Find out the current amount of the federal bankruptcy exemptions.

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