Bankruptcy and Personal Injury Lawsuits

Periodically I meet with debtors who either have a personal injury law suit pending, or may have a potential personal injury case.  Personal injury lawsuit issues can complicate a bankruptcy since there are limitations on the debtor’s ability to receive a personal injury award, as well as different procedural hurdles imposed by the bankruptcy code.

Initially, personal injury lawsuits and causes of action are assets of Chapter 7 Bankruptcy estate.  Under New York’s bankruptcy exemptions, the debtor can exempt the first $7,500 in net proceeds, but anything over and above that belongs to the bankruptcy estate and would be administered by the bankruptcy trustee.  Since personal injury lawsuit or causes of action are assets, it is critical that the bankruptcy lawyer includes the debtor’s personal injury lawsuit or cause of action in the bankruptcy petition.  If the debtor fails to include a potential cause of action in the bankruptcy petition, that may cause a dismissal of the personal injury action.  According to New York cases, if a plaintiff in a personal injury lawsuit filed a Chapter 7 Bankruptcy petition but failed to list a potential cause of action for personal injuries, then the plaintiff lacks standing to bring the personal injury action.

If the personal injury case or cause of action is included in the petition, the bankruptcy trustee will decide whether the case is valuable enough to administer.  The bankruptcy lawyer is expected to provide the trustee with copies of the pleadings.  Most trustees will consider the right to sue for a relatively small injury as being of “inconsequential value to the bankruptcy estate” and may decide to abandon the trustee’s interest in the cause of action.  Generally, if a personal injury case will not result in any significant non-exempt recovery, then the trustee will not care about administering it.  If the trustee determines that the case has value in excess of the exemption, he may want to administer the personal injury claim as an asset of the bankruptcy estate.

The Bankruptcy Code requires that all attorneys who render services to a debtor must be approved by the court.  A trustee may employ as special counsel under a contingency fee arrangement, any attorney who has represented the debtor in pre-petition litigation, when it is in the best interests of the bankruptcy estate and the attorney has no interest adverse to that of the debtor or the estate. Theoretically, the trustee can hire any attorney of the trustee’s choosing to represent the debtor in the personal injury lawsuit, and can even take the case away from the existing personal injury attorney.

The automatic bankruptcy stay imposed by Section 362 of the Bankruptcy Code does not stay any actions brought by the debtor.  The automatic stay only acts to stay actions brought against the debtor including cross-claims, counter-claims and third-party claims.

The greatest unknown in a personal injury case filed by the bankruptcy debtor, is what interest the bankruptcy trustee will take in the case.  Debtor’s bankruptcy attorney would do well to contact the trustee at the earliest opportunity to get an idea of the trustee’s intentions with respect to the personal injury lawsuit.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.