When you have consulted with an attorney about filing a personal injury case, you may expect a settlement or judgment that will pay off most or all of your debt. But while you are waiting on the judgment or settlement, the bills may be piling up and you might begin to consider filing for bankruptcy. How will filing for bankruptcy affect your personal injury claim?

When you have consulted with an attorney about filing a personal injury case, you may expect a settlement or judgment that will pay off most or all of your debt. But while you are waiting on the judgment or settlement, the bills may be piling up and you might begin to consider filing for bankruptcy. How will filing for bankruptcy affect your personal injury claim?

First, it’s important to understand that your personal injury claim is an asset that must be listed in your bankruptcy petition along with all of your other assets, such as your home, vehicle and household goods. This is true even if you do not know whether your case will settle or how much it will settle for! Your bankruptcy attorney will list the claim as an asset for you and protect as much of it as possible.

If you expect your personal injury settlement will cover only your medical bills, your attorney may advise you to file a Chapter 7 if you are eligible. This is because there is very little risk that you will be required to turn over any of your settlement into your bankruptcy estate. Your bankruptcy attorney will advise you whether Chapter 7 is a good option in your case or not.

On the other hand, if you expect a sizeable settlement or you think there is a good possibility that your case will go to trial, your bankruptcy attorney is likely to advise you to file a Chapter 13 in order to give you immediate relief from your creditors while allowing time for your case to either settle or go to trial. Your attorney will protect the maximum amount allowable by taking the personal injury exemption. If your settlement or judgment exceeds this exemption amount, you will probably be required to turn over a portion of the proceeds into your bankruptcy estate to pay your creditors.

Why is this a better option than just waiting to pay creditors with the proceeds on your own, without filing bankruptcy? There are a couple of reasons.

First, filing your bankruptcy petition stops creditors from engaging in collection efforts such as litigation and wage garnishment, and it stops interest, penalties and fees from adding up.

Second, Chapter 13 bankruptcy is an organized and fair way to pay your all of your creditors. Your creditors must file claims in your case and get paid according to a plan that conforms with the bankruptcy rules. This prevents one creditor from getting more than their fair share. And if a creditor fails to file a claim in your case, you will receive a discharge on the debt without paying them a penny!

Third, if you were able to settle with all of your creditors outside of bankruptcy, you would likely receive 1099(c) forms that must be filed with the IRS. This means that you will be required to pay income taxes on the forgiven portion of your debt. That’s not the case when you file for bankruptcy. If you file for bankruptcy and get a discharge on the debt, it is not considered income for tax purposes.

Finally, a Chapter 13 discharge gives you finality. Rather than dealing with creditors for years and even decades in some cases, your Chapter 13 bankruptcy will last no more than five years. Whatever your unsecured creditors receive while you are in your bankruptcy is all that they will ever receive. For example, if your unsecured creditors received 20 cents on the dollar in your plan, not one of them can come back later and demand the remaining 80 percent that you owed them.

Chapter 13 can provide peace of mind and allow you a fresh start while preserving as much of your personal injury settlement as possible.

Please be aware that a Chapter 13 bankruptcy is available to help in many situations that a Chapter 7 cannot. For more information on if bankruptcy can help you please call O'Bryan Law Offices at 502-400-4020 to set up a free consultation with one of our bankruptcy attorneys. We look forward to the opportunity to help you through this difficult time.