Will I Lose My Award Money If I Sue Someone After Filing for Bankruptcy?

If your award is for bodily injury, how much you can keep will depend on the exemptions available to you in your state.

If someone wrongs you—either physically or by damaging your property—your recourse is to file a lawsuit. However, filing for bankruptcy around the same time can eat into any money you might be entitled to receive. Whether you’ll get to keep your settlement or award will depend on when the event occurred, what you’re getting reimbursed for, and the amount that you can protect (exempt) in bankruptcy.

When Did the Event Happen?

After filing a Chapter 7 bankruptcy, all of your property goes into the bankruptcy estate. The estate includes property like your car, household goods, and the money in your bank accounts. It also includes some rights, like your right to be compensated for an injury you had suffered before filing the bankruptcy matter, even if you didn’t know the amount you would ultimately receive that time

For the most part, the bankruptcy court will be concerned with money that you became entitled to before you filed the case. Therefore, you'd have better luck keeping all your award if the incident arose after the bankruptcy. But, if you become entitled to what is deemed “a windfall” within 180 days of filing the bankruptcy, the trustee could challenge your right to keep the proceeds—and will likely win.

How Exemptions Protect Your Property

Creditors in a bankruptcy case get paid when the trustee appointed by the court takes possession of your property and converts it to cash. But the trustee doesn’t take everything. You’re allowed to keep certain items of a particular value.

Ultimately, your state decides the property you can protect. For instance, most states require you to use its state exemption list. Some states, however, let you choose between state and federal exemptions, depending on which system benefits you most.

(You'll find more details in Bankruptcy Exemptions.)

State Exemptions for Lawsuit Awards

In some states, personal injury awards—such as those received as a result of an automobile accident—enjoy virtually unlimited protection. In others, an exemption might be limited to the amount you need for your support. You can access your state’s exemptions at Bankruptcy Exemptions By State.

Federal Exemptions for Lawsuit Awards

If your state allows its residents to choose the federal exemptions, you’ll be able to protect at least some of your award. The federal exemptions include several categories that can apply to lawsuit awards, but they all pertain in some way to personal injury. Therefore, if you sue someone over a contract, a deceptive trade practice, a disputed property line, or any other event that didn’t cause you bodily harm, the protection for your award will be limited to the wildcard exemption, a catch-all for property that doesn’t fit other exemption categories.

Here are the federal exemption amounts available for lawsuit awards (as of June 2017):

  • Bodily injury. $23,675 for bodily injury to you or to someone on whom you depend for support. The settlement document or judgment must be clear that the award is for bodily injury. There’s no specific exemption for pain and suffering.
  • Loss of future earnings. You can exempt amounts intended to compensate you for lost future wages or for the lost future wages of someone on which you depend. Unlike the exemption for bodily injury, this federal exemption doesn’t have a monetary cap. Instead, the exemption is limited to an amount necessary to provide for the reasonable support of you and your dependents. If your award for future wages is more than you need to live on, your trustee could challenge your right to keep it in bankruptcy court.
  • Wrongful death. A wrongful death award will compensate you for the loss of someone who provided support for you or your dependents. The federal wrongful death award exemption doesn’t have a cap. Like future earnings, if the award is more than a reasonable person with your household size would need, the trustee could ask for the excess to pay your creditors.
  • Wildcard. The federal system includes a small exemption that you can use for whatever you like. The minimum amount you can protect is $1,250. If you don’t use your homestead exemption (for instance, if you rent an apartment), you can increase your wildcard by $11,850, thereby allowing you to exempt up to $13,100 of an award that would otherwise not be protected.

Doubling Exemptions in Joint Filings

The federal exemptions and many state exemption systems allow a married couple to double the exemption amount if they file a joint bankruptcy case. Both spouses will be able to claim exemptions for bodily harm only if both were plaintiffs in the personal injury lawsuit.

Additionally, spouses don’t necessarily suffer the same damages from the same event, so one might be able to exempt some portion of the award that the other cannot. If your injury award will be a part of your bankruptcy estate, your attorney in that lawsuit should negotiate and draft the settlement or judgment with an eye toward the available bankruptcy exemptions.

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