Can You Keep Lawsuit Settlement Money After Filing Bankruptcy?
Lawsuit settlements and personal injury awards are assets in bankruptcy that must be disclosed. Bankruptcy exemptions can protect up to $31,575 in federal jurisdictions, though state rules vary. Filing bankruptcy may still benefit you even if you lose part of your settlement, since creditors could reach those funds anyway.
Get Free ConsultationFiling bankruptcy while involved in a lawsuit creates unique challenges. You need to understand what happens to your potential settlement or award.
If you have the right to file a lawsuit, that right is an asset in bankruptcy. Courts call this a “cause of action.” You must list it even if you haven’t filed the case yet. You must list it even if you’re unsure whether you’ll win.
Protect Your Lawsuit Settlement With Expert Bankruptcy Guidance
Don't risk losing your personal injury award or settlement unnecessarily. A bankruptcy attorney can maximize your exemptions and help you keep more money. Free consultation available now.
Speak to Attorney FreeThink of it this way: Any chance you could get money from a lawsuit has value. The bankruptcy court will count it as property you own.
Where You List Lawsuits on Bankruptcy Forms
You must disclose your lawsuit in at least two places:
- Question 33 on Schedule A/B (for pending or potential lawsuits)
- Question 9 on your Statement of Financial Affairs
Already received settlement money? The situation changes. Cash in your bank account gets treated differently than annuity payments. Your ability to protect the funds depends on available exemptions.
Protecting Lawsuit Money With Bankruptcy Exemptions
Listing a lawsuit doesn’t automatically mean losing the money. Bankruptcy exemptions can protect some or all of your settlement.
Federal bankruptcy exemptions protect up to $31,575 for personal bodily injury compensation. Excluded from this limit: pain and suffering or punitive damages.
Federal exemptions also cover:
- Lost future income compensation needed for support
- Wrongful death payments from a family member’s death (if needed for support)
- Crime victim reparation payments
Your state may not allow federal exemptions. Some states offer specific exemptions for personal injury awards. Others provide wildcard exemptions you can apply to any property. A few states offer little protection for lawsuit proceeds.
Not sure which exemptions apply to your situation? Speak with a bankruptcy attorney for free to understand your options.
Dangers of Hiding a Lawsuit From the Court
Failing to disclose your lawsuit creates serious problems. The court could dismiss your entire case. Your debts would remain unpaid and uncanceled.
Hiding your lawsuit can also destroy your claim. The defendant might argue you shouldn’t pursue a case you denied existed. You can’t tell one court one thing and another court something different. Both cases could fall apart.
Chapter 7 Bankruptcy and Your Lawsuit Rights
Chapter 7 bankruptcy only includes assets you owned when filing. You typically keep anything received after filing. Your lawsuit settlement included.
The timing matters: when your right to sue began, not when you filed the lawsuit. An accident after filing Chapter 7 means you keep all settlement money. An accident before filing becomes part of your bankruptcy estate.
Non-accident lawsuits get complicated. You might not realize you have a valid legal claim. Courts may still include overlooked claims in your bankruptcy estate. Whether the claim belongs to your estate depends on state laws.
Honest mistakes usually won’t get your case dismissed. But the trustee may still manage your lawsuit. The trustee could handle settlement negotiations on behalf of your creditors.
Considering Chapter 7? Get a free consultation with a bankruptcy attorney to discuss your specific situation.
Chapter 13 Bankruptcy Treats Lawsuits Differently
Chapter 13 includes some property acquired after filing. Settlement money received during your repayment plan may go to creditors.
Chapter 13 plans last three to five years. Financial changes during this period are common. An accident during your plan means settlement funds might flow through the trustee.
Whether you keep any money depends on several factors:
- Your state’s exemption laws
- Your current repayment plan terms
- The type and amount of settlement
Managing Your Lawsuit Attorney During Bankruptcy
Already working with a lawsuit attorney? Inform them about your bankruptcy immediately. The trustee might take over your case. Or your attorney might continue representing you.
Want your attorney to stay on the case? You need bankruptcy court permission. Your attorney should contact the trustee right away. They should confirm their willingness to continue.
Court-appointed attorneys get paid for their work. Personal injury cases typically use contingency fee arrangements. Your attorney gets paid from the settlement proceeds.
Why Cooperating With the Trustee Matters
Even without exemption protection, cooperate fully with the trustee. Work with them to recover funds for creditors. Cooperation protects your discharge.
Refusing to cooperate puts your entire bankruptcy at risk. The “if I can’t have it, nobody can” strategy backfires. You lose your discharge and the settlement money.
Weighing Bankruptcy Against Lawsuit Proceeds
You can keep lawsuit money protected by exemptions. Excess amounts go to creditors through the bankruptcy court.
Bankruptcy provides valuable benefits. The automatic stay stops collection actions immediately. Discharge eliminates your qualifying debts. Creditors can reach lawsuit funds outside bankruptcy anyway.
Bankruptcy might still make sense even if you lose some settlement money. Balance the cost of lost settlement funds against debt elimination benefits.