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.
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.
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.)
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.
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):
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.