It’s inevitable. At some point in your personal injury career, you will get that dreaded notice from Federal Bankruptcy Court that the defendant in your case just filed bankruptcy. Alternatively, your client comes to you and says they need to file or, even worse, already filed. What do you do now? Is your client’s personal injury case now worthless? Can you proceed? Is it even worth pursuing?
Bankruptcy can be an intimidating and scary area of law for those who do not regularly practice it. While you likely will not be the one filing the bankruptcy, there is vital information you need to discuss with your client and his bankruptcy attorney. If certain information is left off, your client’s personal injury case could be negatively impacted and may be dismissed.
Below are the bare bones you need to know in order to effectively represent your client. However, you should always have a local bankruptcy attorney in your rolodex to walk you through these issues when they arise. There are many forms of bankruptcy, but the top two (Ch. 7 and Ch. 13) are the most common in your typical personal injury case. They are:
Chapter 7 – Asset Liquidation
Chapter 13 – Repayment Plan (Individuals and Married Couples)
Chapter 11 – Large Reorganization (Businesses)
Chapter 12 – Family Farmers
Chapter 15 – Foreign Cases
Chapter 9 – Municipalities
Chapter 7 Bankruptcy
Chapter 7 bankruptcy allows individuals to liquidate their assets to pay their existing debts. A court-appointed Trustee reviews the estate of the debtor to determine if there are assets worth liquidating. The majority of Chapter 7 cases are “no asset” cases. The debtor still receives a discharge from his debts because most debtor’s assets will fit under their state’s allotted exemptions shielding their assets from liquidation.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcies are repayment plans primarily for individuals and married couples. The debts are usually paid back over a three-to-five-year period with the Debtor’s disposable income. Proceeds from a personal injury settlement or verdict must be disclosed and almost always have to be paid into the case. A Trustee is appointed to receive payments and pay creditors.
What Happens if my Client Files Bankruptcy?
The bankruptcy code defines a claim as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Your client’s personal injury claim is an asset that requires disclosure in his bankruptcy case (both Ch. 7 and 13).
However, just because your client is required to disclose his personal injury claim does not mean he will lose his entire settlement/verdict to his bankruptcy; nor, does that mean you are now working pro bono. Tenn. Code Ann. § 26-2-111(2) allows a debtor to exempt part of his personal injury settlement or verdict. The exemptions are:
$7,500 per person in personal injury recoveries.
$10,000 in wrongful death recoveries.
The total exemption may not exceed $15,000.
If your client does not list it and exempt it, he may lose his right to pursue it in state court proceedings. Defendants have successfully argued that a Debtor/Plaintiff is judicially estopped from pursuing his state court claim due to his failure to list it in his bankruptcy petition. While some courts will allow your client to amend his petition to add the claim as an asset, some have not and it is not worth the risk.
When your client files bankruptcy, the trustee holds all the decision-making power over your client’s estate which includes his personal injury claim. While a trustee usually gives you a lot of leeway, he has the power to decide the demand amount and what the case will settle for if he wants that much control. Both the bankruptcy court and the trustee have to approve you to continue representing your client in his Bankruptcy. Below are the minimum steps you, your client, and the bankruptcy attorney should take to make sure both the bankruptcy case and your case continue without issue.
Statement of Financial Affairs
The Statement of Financial Affairs (SOFA) is filed in every bankruptcy petition. It is a list of questions that, when answered, give a snapshot of the debtor’s financial affairs over the last few years. Questions 9 and 15 are relevant to your client’s personal injury claim and it is imperative that your clients know to fill these out.
Question 9 asks “within one year before you filed for bankruptcy, were you a party in any lawsuit, court action, or administrative proceeding?” If you have already filed suit for your client, he needs to ensure the bankruptcy court is aware.
Question 15 asks “within one year before you filed for bankruptcy or since you filed for bankruptcy, did you lose anything because of theft, fire, other disaster or gambling?”
If this is a car wreck case or any type of case involving damage to your client’s property, both real and personal, the safest thing to do is provide the information here. Remember, if you take a case and your new client informs you he is currently in bankruptcy, this question requires him to amend the SOFA and list the new loss.
Schedules B and C
The bankruptcy schedules are a more detailed breakdown of the debtor’s financial status. Your client is required to lists all his personal property assets on Schedule B. This includes his pending personal injury claim. Schedule C is where the debtor can use his state allotted exemptions to keep some of his property from going to his creditors. (See above for Tennessee’s current exemptions for personal injury claims). This is where your client could make a mistake and become judicially estopped from pursuing his state court claim.
Motion to Employ
As stated earlier, the Trustee and Bankruptcy Court now call the shots. When your client files either the Chapter 7 or 13 bankruptcy, you should file a motion with the bankruptcy court asking permission to continue representing your client in his personal injury claim. Check your local bankruptcy court’s website because many times they have templates for this application. As always read the local rules in case there are specific requirements
Motion to Substitute Trustee as Party in State Court Case
The moment your client files his bankruptcy case, his estate is now in the hands of the Chapter 7 or 13 Trustee. This means that the appropriate party for the state court case is now the Trustee. If a motion to employ is not filed and the Trustee is not notified of the personal injury case, the Bankruptcy Court could dismiss your client’s bankruptcy case for defrauding his creditors.
Motion to Approve Settlement Proceeds
Once your client agrees to a settlement or a verdict is rendered, you must file a Motion to Approve the settlement/verdict proceeds. In this motion you will outline at a minimum:
The suggested settlement amount;
The requested attorney fee (which should have already been addressed in your Application to Employ);
The suggested amount being paid to the Trustee; and
The Debtor’s exempted amount in Schedule C.
The next article on The Bare Bones of Bankruptcy will discuss the steps to take when the personal injury defendant files bankruptcy.
- Attorney Joshua Cantrell