How a Bankruptcy Filing Can Affect Your Personal Injury Settlement

Before we get into the gist of this article – which will discuss how bankruptcy proceedings could potentially result in the loss of a valuable personal injury settlement – it’s important to describe the various “chapters” of bankruptcy that federal law offers for people who need relief from extreme financial difficulties. Each of these so-called chapters of bankruptcy law provides a different set of advantages to the organization, the company, or the person filing for protection, but they’re all intended to permit the reduction – or even the complete elimination – of debts to give debtors the chance to start from a “clean slate” and eventually recover from having overextended themselves financially. Here are the most common types of bankruptcy filings you might encounter, and the basic reasons they’re used by debtors in need of relief. Chapter 7 – This type of bankruptcy (often called “liquidation”) is commonly used by individuals who have unmanageable debt resulting from personal loans or credit cards. According to the legal experts at Cornell University Law School, this chapter lets individuals have those types of unsecured debts discharged, while leaving secured debts (such as car loans or house mortgages) in place. Chapter 11 – This form of bankruptcy (sometimes referred to as “reorganization”) offers a large number of options that can include the flexibility to pay off some debts while discharging others, and perhaps even restructuring other accounts by lowering interest rates, extending payoff terms, or reducing principal balances. The disadvantage of Chapter 11 is that its significant filing fees and other costs can be difficult to handle for individual debtors, especially given that people seeking bankruptcy are usually already in financial distress, so it’s most often used by businesses. However, it can certainly be useful to individuals and households under some circumstances. Chapter 13 – This choice (which provides for the adjustment of debts for individuals with regular income) offers debtors some breathing room by extending the repayment time for many obligations to a three- to five-year window. It can also allow for the potential reduction of principal balances on secured debts, or even permit those debts to be fully eliminated.

Only a bankruptcy attorney can advise you on the best option for your specific situation

Each of these different forms of bankruptcy has its own set of rules, benefits, and limitations based upon the types of debts being considered; the income, assets, and other resources available to the debtor; and numerous other factors. So it’s important to seek the advice of a dedicated bankruptcy attorney to be sure the best available option is selected based upon an individual’s financial circumstances and goals. Remember, too, that filing for bankruptcy has long-term impacts on your credit score, so going that route should only be considered if you’re truly under severe financial duress. If you’re one of our valued personal injury clients, we will be happy to refer you to an informed and trustworthy bankruptcy attorney who can assist you in making the best decisions to protect yourself and your family in these types of situations. A key point to learn from your bankruptcy attorney is exactly what might happen to your personal injury settlement if you… or if the defendant in your case… were to file for bankruptcy protection. Let’s take a moment to discuss each of those possibilities now.

What can happen if you win a personal injury settlement but then find it necessary to file for bankruptcy?

As personal injury attorneys, we always recommend that our clients promptly safeguard their settlement funds by seeking help from a trusted financial advisor. Properly and safely investing your settlement money is a wise course of action and can help secure a future where you can concentrate on recovering from your injuries and living your best life without undue stress or worries about finances. However, we also know that overextending yourself financially can sometimes happen, especially given the temptation of having an unexpectedly large amount of money sitting in the bank. Such a windfall can lead to uncontrolled spending and ultimately to the accumulation of unmanageable debts. So, it’s important to know that if you find yourself considering entering bankruptcy proceedings under these conditions, you could be risking the loss of your remaining settlement money because you need to report all your assets to the bankruptcy court. Under these circumstances, you could possibly be ordered to liquidate your assets – including your personal injury funds – to pay off your debts. Again, an attorney specializing in bankruptcy law can best advise you as to the most effective ways to protect your settlement and any other assets in this type of situation. Another potential issue might arise if you’re already in bankruptcy and then win a personal injury settlement. Will your settlement funds be at risk of being taken from you to pay off debts under such an unfortunate circumstance? Once more, only a knowledgeable bankruptcy attorney can provide you with certainty in this type of situation and many others like it. So don’t rely on guesswork or the well-meaning advice of friends. Ask a lawyer to get an unbiased, accurate answer you can depend on.

What might happen if you win a personal injury settlement and the defendant files for bankruptcy?

It’s perhaps a sad fact of life that, all too often, the deserving recipient of a large personal injury settlement is prevented from immediately receiving any promised funds because the irresponsible defendant who lost the case files for bankruptcy protection. In such circumstances, you will definitely need the assistance of a bankruptcy attorney to help you protect your legitimate claim from being discharged in federal bankruptcy court. Fortunately, if the defendant in your case has a liability insurance policy, it’s improbable that your settlement would be totally at risk since the insurance company is highly unlikely to file for bankruptcy even if faced with paying a large sum. That’s why it’s a very good thing Michigan law requires drivers to carry auto insurance policies with liability protection. But in cases where the defendant is underinsured or even completely uninsured, you’re likely to find it highly difficult – or perhaps entirely impossible – to collect a personal injury settlement award. Michigan remains one of the worst states in the nation for uninsured drivers, with nearly one in five cars on the road not currently covered by auto insurance policies; that’s why we always recommend that every Michigan driver carry uninsured motorist coverage on their car insurance policies. At least that way you’re somewhat protected if you happen to encounter a reckless driver who’s skirting the law by not buying car insurance.

Our best advice to you about bankruptcy is to cover all your bases

Beyond the circumstances we’ve just discussed, there are a large number of other situations where bankruptcy-related issues can affect a personal injury settlement. To learn more, check out this lengthy, but very helpful, article from a noted legal encyclopedia. And if you ever think there’s a chance you may have to file for bankruptcy… or if it seems likely that the defendant in your personal injury case might do so… remember that you’ll want a team of dedicated personal injury attorneys and a strong bankruptcy lawyer on your side. Fortunately, we’re ready to help you on both counts – by offering you the unmatched legal knowhow of Michigan’s largest personal injury law firm, and by recommending dependable lawyers intimately familiar with federal bankruptcy laws who can act on your behalf. All you need to do is call 855-MIKE-WINS (855-645-3946) to get some of the state’s – and the nation’s – best legal minds working for you and your loved ones right away.