Updated May 25, 2016
Last year I was standing at the customer service counter in the local hardware store when a large roll of tar paper propped against the counter fell down and broke my ankle. Since I’m a grocery clerk, I couldn’t work and the bills stacked up fast. I want to file a Chapter 7 bankruptcy but I just settled my personal injury case with the hardware store for $75,000. Will I have to give it up the settlement money if I file for bankruptcy?
It depends on the state you live in. Since the injury occurred before you filed for bankruptcy, your $75,000 settlement is an asset of the bankruptcy estate. While you don’t have to give up all of your assets when you file, how much you can keep (“exempt”) depends upon state law.
Most people want to file Chapter 7 bankruptcy because it wipes out most, if not all, of their debts. In return you must give up certain property which the bankruptcy trustee will sell and use the proceeds to distribute to your creditors. (Learn more about how Chapter 7 bankruptcy works.)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.
Each state has its own set of exemption laws. And some states allow you to use the federal bankruptcy exemptions instead of state exemptions. (Learn more about how exemptions work. To find your state exemptions laws and learn whether you can use federal exemptions, visit our State Bankruptcy Exemptions topic page.)
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 bankrutpcy.
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. This includes 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 example, contract disputes, real estate actions, and discrimination cases.
You must list all of your property on the proper schedules in the bankruptcy petition you file with the court. This includes any funds you receive 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 the crime of fraud. If convicted, you could face fines, jail time, or both. (To learn more, see What Happens If I File to List Pending Lawsuits in My Bankruptcy Papers?).
Your ability to exempt your settlement depends upon where you live because the rules vary greatly from state to state.
Personal Injury Lawsuit Exemptions
While some states allow you to exempt all the proceeds from personal injury cases, some only allow you to do so if the settlement is from a wrongful death action. Other states limit your exemption to the amount of money you 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 is 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. Here is what you can keep under the federal exemptions: