When you file for bankruptcy, you may not be able to keep an insurance claim. However, this can depend on a number of factors such as:
- The Settlement Amount
- The Time of the Settlement Filing
- State and Federal Exemption Laws
- Whether you Filed a Chapter 7 or Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
If you file for a chapter 7 bankruptcy, almost all the property you own becomes part of the bankruptcy estate. Unless you can protect it with a bankruptcy exemption. Otherwise, the trustee overseeing your case can sell any asset that is nonexempt in order to repay your creditors.
Your estate property can include assets that you obtain after you file for chapter 7. 180 days after you file your bankruptcy case, future awards can be used to repay your creditors. Assets belonging to the bankruptcy estate depend upon the date of entitlement, not the date of payment.
Retaining Property in Chapter 7 Bankruptcy
Typically, most people file for chapter 7, as it wipes out most, if not all debt. In exchange for clearing your debt, the bankruptcy trustee will sell all nonexempt property/assets, in order to pay your creditors. Certain property may be exempt by state and federal law, which will allow you to keep some property.
How Chapter 7 Will Proceed
If the potential claim award is greater than the amount you can exempt, your bankruptcy trustee will take control of the lawsuit; deciding how it will proceed. Once the trustee collects the award amount, they will disburse it appropriately. Typically the nonexempt portion will be used to repay your creditors; remaining funds being sent back to you.
Chapter 13 Bankruptcy
If you file for chapter 13 bankruptcy, any property that you obtain during the course of your claim, as well as the property you owned prior to the claim, will become the property of the estate. Generally, a chapter 13 case lasts anywhere from 3-5 years. If you receive a settlement within this time frame, that doesn’t meet the exemption guidelines, you may have to pay more towards your unsecured debts in your repayment plan.
How Chapter 13 Will Proceed
Under chapter 13 bankruptcy, you can continue to pursue your claim on your own, without the help of a bankruptcy trustee. However, if there is a monetary recovery, and this recovery doesn’t provide full payment to your creditors, you must turn over all nonexempt funds to your creditors for their payment.
What is the Difference Between Chapter 7 and Chapter 13?
The main difference is the filer’s income level. In order to be eligible for a Chapter 7 bankruptcy, one must fall below a certain income level. Furthermore, Chapter 7 and Chapter 13 have different repayment methods. Chapter 7, is referred to as “liquidation” bankruptcy, meaning most of the debtor’s assets are liquidated, or sold for cash, which is then used to repay creditors.
Whereas, Chapter 13 repays creditors by setting up a payment plan between the debtor and creditor. However, with chapter 13, those filing for bankruptcy can keep certain assets like their home and vehicle. This repayment plan usually lasts anywhere from 3 to 5 years, during this time, the debtor remains legally protected from pursuit by any of the other creditors.
There are federal and state exemption laws that may be applicable to your bankruptcy case. Some states will allow you to use federal exemption rules rather than state rules; whichever one would be the most beneficial to the bankruptcy claimant. These states are Alaska, Arkansas, Connecticut, Washington D.C., Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.
Some states will allow you to exempt all funds received from a personal injury lawsuit, while others will only allow you to do so if the compensation resulted from a wrongful death action. Still, other states may allow you to keep only a specific amount of your personal injury recovery.
If your state has a wildcard exemption you can exempt any property of your choice, up to a certain dollar amount. These limits can vary by state, be sure to check your state statute to learn how and if this exemption applies to your case.
How Can Bankruptcy Impact My Personal Injury Claim?
Unfortunately, if your personal injury claim is still going through the court, and/or the insurance company, you will lose your insurance settlement if you file for Chapter 7 bankruptcy. This will include any compensation meant to pay for future medical treatment.
However, not all injury claims will be considered part of the bankruptcy estate. If you are filing a claim with worker’s compensation insurance, you will be able to keep the entire settlement award.
Bankruptcy Claims Will Not Clear You of Certain Debt
After an auto accident, if you file for bankruptcy your medical bills from the accident will not be waived, and you must continue to pay them yourself. However, the trustee may pay a portion of your medical expenses after you have been awarded damages.
Insurance Tactics Involving Bankruptcy Claimants
Insurance companies do not want to pay out on insurance claims and work hard to reduce the settlement amount. Adjusters will check recent bankruptcy filings, and they will also check that the insurance claim was properly disclosed on the bankruptcy proceeding paperwork.
Failing to report an insurance claim on your bankruptcy paperwork, will cause the insurance company to request case dismissal; on the basis that the true plaintiff is now the bankruptcy estate, and not the injured party.
Disclose all Property
All property that you own, as well as all monetary assets that you are eligible for (i.e. insurance settlements, inheritances, and/or lottery winnings), must be listed on the proper form in the bankruptcy paperwork. If you fail to disclose potential monetary gain from a settlement, you may face significant consequences, for example, you may be charged with fraud, and if convicted you may face fines, jail time, or both.