If you’re involved in a personal injury lawsuit – as a plaintiff or defendant – a bankruptcy filing could send the case off the rails.
People get hurt. Sometimes they sue someone in connection with that injury.
People get into debt. Sometimes they file for bankruptcy to get out of debt.
And sometimes, people who are in debt are also a party to a personal injury lawsuit.
That’s when things get complicated.
If You’re Suing Someone Else And File For Bankruptcy
When you file for bankruptcy, all of your property gets turned over to the control of the bankruptcy trustee.
If you’re in a Chapter 7 bankruptcy the trustee’s job is to take all non-exempt property, turn it into cash, and distribute that cash to your creditors.
If you file a Chapter 13 bankruptcy then the proceeds of any settlement or judgment are used to fund your Chapter 13 Plan.
This means that, in the absence of court permission, the right to collect the money is out of your hands. It’s only when the trustee gives up the property that you regain control of it.
Just as important is the fact that under the bankruptcy laws you’re required to cooperate with the trustee assigned to your case. If the trustee decides to hire a lawyer to take over the case, you’ll still need to do your part.
If You’re Being Sued And File For Bankruptcy
So long as the debt is dischargeable, your personal obligation to repay the debt will be wiped out in a bankruptcy case.
In addition, the lawsuit has to stop while you’re in bankruptcy unless the other side gets relief from the automatic stay.
Once the bankruptcy case is over, the personal injury lawsuit against you will pick up where it left off. Your insurance company will still pay out to the extent that you’ve got coverage, but that’s all the other side can possibly get.
If The Other Side Files For Bankruptcy
Most civil lawsuits are subject to the automatic stay in a bankruptcy case. The minute the bankruptcy is filed, you can’t continue the action.
Like a children’s game of “red light, green light, 1-2-3-,” you’ve got to stop where you are. And if you want to continue with the lawsuit while the other side is in bankruptcy you’ll need to ask for court permission.
Disclose The Lawsuit, Disclose To Your Lawyer
When you file for bankruptcy, you’re required to disclose all of your assets – including the right to sue someone else.
You’re going to want to talk with your lawyer about the pending claim. Work together to put together a strategy to keep as much of the proceeds of settlement or judgment as possible.
- Filing for Bankruptcy Means Showing Your Cards
- Walk Into Bankruptcy Naked – Or Walk Out Naked
- How To File Bankruptcy – Listing Your Property
If you don’t disclose the lawsuit on your schedules and Statement of Financial Affairs, you could lose the right to begin or continue the action.
Overall, it’s a tricky situation – but one you can resolve by being honest and accurate in your dealings with your lawyer as well as the trustee.