Can I keep my personal injury award if I file for bankruptcy in California?
As a personal injury lawyer in California, one of the scenarios I see is people struggling financially after a serious car accident or other injury. Medical bills pile up and if the injury leaves the person unable to work even for a brief period of time, this can lead to debt issues. One possible solution is personal bankruptcy. But many people are reasonably concerned about whether they may part or all of their personal injury settlement or award if they file bankruptcy.
The information below provides an overview of how personal injury proceeds are treated in consumer bankruptcy cases. But there is one important point that must be clear to start: if the car accident or other injury has already happened, the claim for damages is already an asset and must be listed in your bankruptcy case. Many people make the mistake of thinking that if they haven’t yet been paid or haven’t filed their lawsuit, that money doesn’t count. It does.
How do Chapter 7 and Chapter 13 bankruptcy affect a personal injury settlement?
There are several different types of bankruptcy cases, but nearly all individuals who file bankruptcy file under either Chapter 7 or Chapter 13. In a Chapter 7 case the bankruptcy filer can typically discharge most unsecured debt. (e.g. credit card debt, medical bills, deficiency balances owed on surrendered vehicles, etc.). A Chapter 13 bankruptcy allows a debtor to reorganize obligations (i.e. pay some debt back, reduce the amount for other debts and, sometimes, outright discharge certain types of debt).
Of course, each type is a little more complex than the brief summary above. And, because they are different types of plans with different goals, the way assets are treated is also a bit different.
- Chapter 7 Bankruptcy Effect on An Accident Claim Judgment or Award: Because Chapter 7 bankruptcy allows the debtor to completely discharge their obligations to most all unsecured creditors, the bankruptcy trustee has the right to liquidate (sell) any non-exempt assets the debtor has and use those funds to partially pay creditors. The exemptions that may protect some or all of your personal injury settlement or award are described below. A personal injury award becomes the property of the debtor’s bankruptcy estate during the pendency of their case.
- Chapter 13 Treatment of a Personal Injury Settlement: In a Chapter 13 case, the debtor agrees to pay some or all of their debts through a court-approved payment plan. The debtor is usually able to keep some or all proceeds received from an accident lawsuit in a Chapter 13 case. However, this depends upon a lot of factors including the amount agreed to be paid to unsecured creditors and other issues.
How do bankruptcy exemptions apply to a personal injury claim in California?
In some states, bankruptcy filers can choose between state and federal exemptions. California doesn’t allow the use of federal exemptions, but does provide a choice of exemptions. One set provides a much larger homestead exemption than the other, so whether the filer owns a home and how much equity they have is often the deciding factor.
Section 704 exemptions are intended to protect a significant amount of value in the bankruptcy filer’s home. Some other exemptions are smaller under this section. This system does allow the bankruptcy petitioner to exempt personal injury proceeds to the extent necessary to provide for the support of the debtor and their dependents. However, the burden is on the debtor to prove that the proceeds are necessary to support themself and their family, and what is necessary is determined on a case-by-case basis. So, the amount a bankruptcy filer can keep varies and may not be entirely predictable.
Section 703 exemptions include much less protection for the debtor’s home. Instead, filers who use these exemptions get more protection in other areas, including a wildcard exemption that includes any unused portion of the homestead exemption. These dollar amounts are updated every three years. From April 1, 2025 through March 31, 2028, those numbers are:
- Up to $36,750 in proceeds received for bodily injury to the debtor or a dependent
- A wildcard exemption of $1,950 plus any unused portion of the $36,750 homestead exemption
- Funds awarded to replace projected lost future earnings, to the extent they are necessary to support the debtor and their dependents
An experienced Los Angeles bankruptcy attorney can explain how the “necessary for support” analysis will likely play out in your case and help you determine which set of exemptions would be best for your circumstances.
Why do I need a bankruptcy lawyer if I already have a personal injury lawyer?
The laws of exemptions are complicated for the average lay person to understand, and most injury lawyers don’t have extensive experience with protecting assets in bankruptcy. The role of the personal injury lawyer is to try to obtain maximum compensation for the injury. However, in bankruptcy, issues that don’t make a difference in the overall compensation could be important. For example, the Section 703 exemptions treat personal injury awards differently depending on how damages are categorized.
If you have an injury claim and are considering bankruptcy, it is important to retain experienced bankruptcy counsel as early in the process as possible. Your bankruptcy lawyer and your personal injury lawyer should work together to find the best way to protect as much of your injury compensation as possible while getting the debt relief you need.