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How Bankruptcy Can Affect Your Personal Injury Case

In 2012, 1,181,016 individuals and 40,075 businesses filed for bankruptcy protection in the United States (source). While there are many different circumstances that drive a person’s decision to file for bankruptcy, usually the goal is the same.  The goal is to get a fresh start in life.  This “fresh start” is also supposed to be the purpose of the bankruptcy code.  The Supreme Court has stated that “[o]ur decisions lay great stress on this feature of the [bankruptcy] law-as one not only of private but of great public interest in that it secures to the unfortunate debtor, who surrenders his property for distribution, a new opportunity in life.”  Stellwagen v. Clum, 245 U.S. 605, 616 (1918).

A common circumstance that leads to bankruptcy is a severe personal injury.  Many people that suffer a personal injury also experience economic difficulties.  This is due to the fact many people who are injured through the fault of another, lose time from work or lose their jobs completely.  Then on top of that many people are without health insurance, or their insurance does not cover all of their expenses.  As the medical bills pile up, the creditors mount their assault.  Naturally, many people choose to get the fresh start that filing for bankruptcy was meant to provide.  But be extremely careful, if your personal injury attorney does not understand the way bankruptcy can affect your personal injury case, or is unaware of your bankruptcy case, you could lose your ability to recover anything at all.  What’s even worse is that the person responsible for causing the injury gets off Scott free.

When your bankruptcy attorney files a bankruptcy petition on your behalf, an estate is created.  11 U.S.C. §541(a).  The bankruptcy estate is comprised of all of your legal or equitable interests as of the date the petition was filed, including any claims that you have a right to bring regardless of whether you have brought them prior to filing the bankruptcy petition.  11 U.S.C. 101(5).  This includes any right you may have to bring a claim for the injury you suffered.  What makes it even more confusing is that if you file under Chapter 13, even property that you acquire after the commencement of the case, but before the case is closed dismissed or converted, is property of the estate.  11 U.S.C. §1306.  So if you are injured through the fault of someone else and then file for bankruptcy, your right to bring a cause of action will become property of the bankruptcy estate.  If you file for Chapter 13, even an injury you suffer after the petition is filed is property of the bankruptcy estate.  This is true even though Virginia law makes any recovery from a personal injury 100% exempt from creditors.  Va. Code Ann. 34-28.1.

One of the requirements you have as a debtor is to list any and all property, including your personal injury claims (or even potential claims), in the schedules that your bankruptcy attorney will provide.  If you have a personal injury claim you must list it in the schedule as exempt, and you must place a proper value on the claim.  Contact a competent personal injury attorney to make sure that the valuation is correct.  Then the bankruptcy trustee will either abandon the claim, or the Court will rule that the claim is exempt.  Then and only then will you have the ability (standing) to bring your personal injury claim in your own name.

In 2011, the Virginia Supreme Court showed just how important it is to list these claims in your schedules.  Kocher v. Cambell, 282 Va. 113, 712 S.E.2d 477 (2011).  In Kocher, the debtor was injured prior to the filing of the bankruptcy Chapter 7 petition, therefore his claim became property of the estate at the time of filing pursuant to 11 U.S.C. §541.  The debtor failed to list the contingent, already existing claim in his schedules prior to receiving a discharge, and prior to the actual closure of his bankruptcy case.  After the closure of the debtor’s case but within the statute of limitations, he filed his personal injury claim.  The defendant moved to dismiss the case for lack of standing.  The Court held that since the claim was property of the estate and not properly exempted at the time of filing, the plaintiff had no standing to bring the claim and thus the statute of limitations was not tolled by the filing.  The debtor recovered nothing, and the defendant was let off the hook.

Whether you filed for bankruptcy before you were injured, or are planning on filing for bankruptcy as a result of your injury, be sure that your personal injury attorney and your bankruptcy attorney know the consequences and are in communication with each other.