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 Automatic Stay
Bankruptcy Code Section 362 discusses the automatic stay. It has been said that the automatic stay is one of the most powerful laws in the United States Code. Immediately upon the filing of a bankruptcy, the automatic stay is invoked. The Stay does exactly as it sounds; it “stays” certain creditors and governmental entities from taking actions deemed collection efforts against a creditor. This means creditors cannot sue, garnish wages, assert a deficiency, repossess property, etc. If a creditor violates the automatic stay, they may be ordered to pay punitive damages, sanctions, and/or attorney’s fees. In some situations, the automatic stay is not imposed after filing Bankruptcy, but for personal injury claims/cases, the stay will be applicable to your client and is in place immediately at the filing of the bankruptcy.
So, what does this mean for your client? You MUST file a motion and obtain relief from the stay. If you properly file a Motion for Relief and the bankruptcy Judge grants your Motion, the automatic stay can be removed or temporarily modified so that your client may continue pursuing their personal injury claim. Check your local bankruptcy court’s website and local rules. Generally, they have template forms for a Motion and Order for Relief from Stay. My office has all the forms needed to accomplish this as well.
Typically, the Defendant’s personal obligation on your personal injury claim will be discharged at the end of their bankruptcy case. However, you are still allowed to pursue the personal injury claim, upon relief from the stay, to pursue the debtor’s insurance.
In Re Morris explains this perfectly. In Morris, a creditor had a personal injury claim against the debtor who had filed for chapter 7 bankruptcy. The Court decided that a Bankruptcy Discharge did not erase an insurance company’s liability. “Despite the fact that 11 U.S.C. § 524(a)(2) prohibits a creditor from attempting to hold a debtor personally liable for a pre-petition debt, it does not preclude a determination of the debtor’s liability on the basis of which indemnification would be owed by another party.” In re Morris, 430 B.R. 824 (Bankr.W.D.Tenn.2010). So, just because the debtor filed for bankruptcy does not mean your client no longer has a case.
Proof of Claims
A proof of claim (Official Form B10) is the form used to note the amount owed (if determined) by the debtor as of the date of the filing of the bankruptcy. The creditor/personal injury plaintiff must file the form with the bankruptcy court where the case was filed. Just because there is not an agreed upon amount owed in the personal injury case does not mean you cannot file a proof of claim. You are still permitted to file claims for contingent and/or unliquidated debts.
As discussed earlier, a Chapter 13 is a repayment plan. You should always file a Proof of Claim in a Chapter 13 case even if you do not have a judgment. Chapter 13 bankruptcies can last up to five years. If you obtain a judgment in excess of the insurance limits within those five years, there may be some additional funds that were paid into the bankruptcy case that could be disbursed to your client. However, if you do not file the Proof of Claim on time, your client will be barred from collecting those funds.
In a Chapter 7 Bankruptcy, a trustee will review the Debtor’s estate and determine if there are assets available to be liquidated. If there are assets available for liquidation, your client will receive notice of this. If your client receives such notice, you should always file a Proof of Claim even if the amount owed has not yet been determined. The trustee will hold those funds, until the resolution of your case in the event of an excess judgment.
Bankruptcy Rule 3002 “Filing Proof of Claim or Interest” outlines the rules surrounding the deadlines and requirements for a Proof of Claim. Rule 3002(c) requires you to file the proof of claim not later than 70 days after the order for relief under Chapter 13 and not later than 90 days after the order for relief is entered in Chapter 7 cases. There are some exceptions for certain types of creditors but they are not applicable to personal injury cases.
Reopening the Bankruptcy Case
As you are well aware, the claim in a personal injury suit arises when the injury takes place; the day the statute of limitations begins to run. That is when the claim or “debt” is originated for bankruptcy purposes. Why is this important? Often times, a debtor/personal injury defendant may file a Chapter 7 Bankruptcy and it close before the statute of limitations runs in the personal injury case.
Even if the Chapter 7 is closed, the automatic stay still prohibits you from proceeding with any type of collection efforts such as filing suit. So, what must you do? As soon as you find out the debtor/personal injury defendant has filed for bankruptcy and it has already closed, you must file a Motion to Reopen the case for the purposes of filing a Motion for Relief from the Stay. If you do not, you run the risk of a Motion for Sanctions against you for violating the automatic stay. You can find most of these template forms on your local bankruptcy court’s website.
Review the Petition
The Bankruptcy Petition is a collection of documents required to be filled out by the Debtor in order to get relief from the Automatic Stay. As part of the petition, there are schedules that disclose the debtor’s assets and financial information. Additionally, the Statement of Financial Affairs further breaks down the debtor’s financial status. Often times, Chapter 13 cases are dismissed because the debtor stops paying into the case so you may find good nuggets of information that you may use in building your personal injury case.
Additionally, you may find information that can be used for impeachment purposes. For example, you may see other existing or prior law suits the defendant has been a part of that could be relevant to your case. In the Schedules, you will see a great snapshot of the Debtor’s financial position and if it is worth pursuing an excess judgment or not.
In summary, this is meant to be the “Bare Bones” of what you must do in the event the personal injury defendant files bankruptcy. As with any area of law there are some exceptions to the imposition of the Automatic Stay and the necessity of filing a Proof of Claim. However, by following the process given above, you should not risk running afoul with the Federal Bankruptcy Court and will continue breathing life into your client’s personal injury case. Stay tuned for part 3 of The Bare Bones of Bankruptcy which will discuss miscellaneous matters regarding personal injury cases and bankruptcy and strategies to make your client’s debt non-dischargeable.
Insurance Proceeds are Still Collectable
Even if a debtor receives a discharge, the underlying liability and uninsured/underinsured motorist carriers are still be obligated and liable to your personal injury client. I have found that many bankruptcy attorneys are not aware of this, will fight you on the continued pursuit of your personal injury case, and may even threaten you with sanctions for violation of the automatic stay.
While you still have to obtain relief from the automatic stay if the case is still pending, the bankruptcy court will allow you to continue pursuing your case and the debtor (tort defendant) is still required to participate. “Despite the fact that 11 U.S.C. § 524(a)(2) prohibits a creditor [PI Plaintiff] from attempting to hold a debtor personally liable for a pre-petition debt, it does not preclude a determination of the debtor’s liability on the basis of which indemnification would be owed by another party.” In re Morris, 430 B.R. 824, 828 (Bankr. W.D. Tenn. 2010).
In Morris, the Court goes on to state that although the underlying obligation is personally discharged against the debtor, his attendance at depositions and trials is not a burden alleviated by a discharge injunction when establishing liability and is under the same requirements as any other witness would be. Id. at 829. Last, the Court found that at least in Chapter 7 cases, “a creditor’s failure to file a claim or seek relief from the stay does not impact the right to pursue recovery from a third party.” Id. 831. Even though Morris doesn’t require it, it is still strongly encouraged to obtain relief from the automatic stay and have a court order establishing the debtor’s requirement to participate in the personal injury case.
Relevant Personal Injury Debts Excepted from Discharge
It is generally presumed all debts filed under Chapter 7 bankruptcy will be discharged unless specifically objected to. U.S.C. § 523(a) outlines nineteen different types of debts that are nondischargeable. Most of these are not relevant to personal injury actions; however, there are some that every personal injury lawyer should know. The two most relevant exceptions I have used in my personal injury practice are:
11 U.S.C. § 523(a)(6). – Willful and Malicious Injury
A discharge may not be granted for willful and malicious injury by the debtor to another entity or to the property of another entity. This means that debts for injuries stemming from general reckless and negligent conduct are dischargeable under § 523(a)(6). Kawaauhau v. Geiger, 523 U.S. at 64; see In re Quari, 357 B.R. 793, 798 (Bkrtcy. N.D. Cal., 2006). Willfulness and malice are two separate requirements; they are not to be merged into a single analysis. However, both must be proven for a debt to survive discharge. In re Ormsby, 591 F.3d 1199, 1206 (9th Cir. 2010). Last, while bankruptcy law governs what debts are non-dischargeable, bankruptcy courts should look to state law to determine whether the underlying act is a tort. In re Bailey, 197 F.3d 997, 1000 (9th Cir. 1999).
As to the willful requirement, the Sixth Circuit has adopted a strict subjective approach while some circuits courts have adopted an objective analysis. Under the Six Circuit approach, a debt is nondischargeable under § 523(a)(6) only if the debtor intended to cause harm or knew that harm was a substantially certain consequence of his or her behavior. For example, in Markowitz v. Campbell, 190 F.3d 455 (6th Cir. 1999), a debtor owed money arising from a legal malpractice claim. The creditor argued the debt should be considered non-dischargeable under § 523(a)(6)’s “willful and malicious injury” provision. The Court found that unless “the actor desires to cause consequences of his act, or … believes that the consequences are substantially certain to result from it, he has not committed a ‘willful and malicious injury’ as defined under § 523(a)(6). Id. at 464.
A malicious injury involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse; it may be inferred based on the nature of the wrongful act. In re Ormsby, 591 F.3d 1199, 1207 (9th Cir. 2010).
Both of these elements must be proven for your client’s debt to survive discharge. It is important that it is pled properly with those key words in your complaint scattered throughout your lawsuit as often as you can in discovery, request for admissions, depositions, etc.
11 U.S.C. § 523(a)(9) - DUI Cases
U.S.C. 523(a)(9) does not allow for a debt to be discharged if that debt is “for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.” So, if the wreck was a simple fender-bender, it would be dischargeable, but if it was a result of some DUI or DWI, the debt is considered non-dischargeable.
What is the Procedure to Deem Debt Nondischargeable?
You may need to pursue one of these exceptions if you feel your case is one that may be in excess of insurance costs or there is no insurance coverage because of the nature of the tort, etc. If that is the case, you should draft your complaint, request for admissions, and discovery in mind to be able to prove these elements for willful and malicious injury or driving under the influence as outlined above.
Deeming a debt as nondischargeable is accomplished through the filing of an adversary proceeding in the debtor’s bankruptcy case. An adversary proceeding is simply the filing of a complaint, stating the allegations that support a finding of non-dischargeability under § 523(a). If there have been no findings by another Court already, this is where the facts surrounding the non-dischargeability will be litigated and decided on by the bankruptcy court.
However, under the doctrine of collateral estoppel, if done properly, the bankruptcy court may adopt the state court findings in your case and find the debt nondischargeable without the need of litigating it again in the adversary proceeding. While § 523(a) is silent as to the burden of proof required to prove an exception, the United States Supreme Court ruled in Grogan v. Garner that the preponderance of the evidence standard, rather than clear and convincing, is the burden of proof to be used in determining non-dischargeability of debts. Grogan v. Garner, 498 U.S. 279, 288 (1991). This is so even if a state court requires a higher burden of proof for claims of fraud, etc.
In In re Halpern, the Appellate Court determined that the bankruptcy court was “precluded from retrying an issue allegedly litigated in a prior proceeding only if:
- the issue at stake was identical to the one involved in the prior litigation;
- the issue was actually litigated in the prior litigation; and
- the determination of the issue in the prior litigation was a critical and necessary part of the judgment in that earlier action.
In re Halpern, 810 F.2d 1061, 1064 (11th Cir. 1987).
Keep this in mind when litigating your case in state court. If you follow the steps above, you should not have to re-litigate your case in bankruptcy court further wasting both your and the courts time and resources.
In summary, this series was meant to be the “Bare Bones” of what you must do in the event your client or the defendant files bankruptcy. As with any area of law there are some exceptions, but following the general principles given in this series will help you understand the basics so you and your client can make an educated decision on how to move forward in their case. Below are the bare bones of what must be done depending if your client files or the defendant files and discussed in more depth in parts 1 and 2.