Personal injury can often mean an influx of medical bills, the inability to work, or reduced income, all of which have the injured person seeking financial assistance or relief to get them through the time it takes to recover from the injury. Bankruptcy is one option to help with financial distress in situations such as this, however, it is important to understand how bankruptcy will affect the injured person’s ability to receive any payment they are owed through a personal injury claim.


In bankruptcy, a personal injury claim is an asset that a debtor must disclose on their bankruptcy petition if the injury occurred prior to the bankruptcy petition being filed. If the injury occurred after the bankruptcy petition was filed, the petition does not need to be amended to include the asset, and the debtor may receive the full benefit of the claim. A personal injury claim that has not been settled, or that has not been paid to the injured person, by the time the bankruptcy petition is filed, is still considered an asset that must be disclosed. Failure to disclose this claim could result in severe penalties from the bankruptcy Court.


When a personal injury claim must be disclosed on the bankruptcy petition, it becomes property of the bankruptcy estate, which means that the property can be liquidated or required to be turned over to the case trustee for the benefit of the debtor’s creditors, unless an exemption applies. To determine if an exemption will apply to a personal injury claim, a debtor should first understand which set of exemptions the debtor will be using based on the state he lived in the longest within the 730-days (approximately two years) prior to the filing of a bankruptcy petition. 11 U.S.C. § 522(b)(3)(A). This is because each state has its own set of exemptions, and each state has provided either that (1) it will allow debtors to choose between the federal exemptions and the state exemptions, or (2) the debtors are required to use the state exemptions. If the debtor’s determined domicile is in a state that allows the debtor to choose between federal or state exemptions, a debtor can choose which set of exemptions will benefit him the most.


Let’s look at Janet for example. Janet was injured in a car accident and was considering filing a bankruptcy petition due to her inability to keep up with credit card bills after taking time off of work to recover from her injury. She was expecting a personal injury claim of about $20,000, which included payment for bodily injury, reimbursement for medical bills, lost wages, and pain and suffering. Janet’s domicile was determined to be Vermont, a state that allows the debtor to choose between the federal exemptions and its own state exemptions. At the time, Vermont had an unlimited personal injury exemption, which included pain and suffering or actual pecuniary loss, to the extent reasonably necessary for the support of the debtor. 12 V.S.A. § 2740(19)(F). The federal exemption limited the debtor’s right to a payment, not to exceed $15,000, which did not include pain and suffering or compensation for actual pecuniary loss of the debtor. 11 U.S.C. § 522(d)(11)(D). In this case, Janet would probably be better off using the Vermont exemptions because her personal injury recovery was more than what was allowed under the federal exemption, and her recovery included payment for pain and suffering and pecuniary loss.


Not all debtors are lucky enough to have state exemptions that are more beneficial than the federal exemptions, such as Arkansas and Connecticut, which do not have any exemptions for personal injury recovery. There are also several states that require a debtor to use the state exemptions, which do not provide an exemption for recovery of a personal injury claim, such as Arizona. In states such as these, it is crucial to understand the amount to be received from a personal injury claim and being able to time a bankruptcy filing to receive the most benefit from the claim.  


There are additional considerations to be had when a personal injury matter is pending, and a bankruptcy is imminent. For example, an injured person that has not completed medical treatments should understand that if he files bankruptcy, regardless of the recovery of a claim, any medical bills incurred after the bankruptcy petition is filed will not be dischargeable. Additionally, any personal injury claim received within six months of filing a bankruptcy petition will also need to be treated as income, which may be important if a debtor has Chapter 7 qualification issues.


It is important that someone involved in a personal injury matter, that is considering bankruptcy, speak with a knowledgeable attorney such as the bankruptcy lawyer Phoenix AZ locals turn to to make an educated decision as to whether the claim will be safe from creditors in bankruptcy, as there are many complicated factors to be analyzed.

Thanks to authors at Platt & Westby PC for their insight into Bankruptcy Law.