Filing for bankruptcy while you have a pending personal injury claim or after receiving a settlement raises important questions about what happens to that money. Many people worry that creditors will take their entire settlement. However, bankruptcy and personal injury exemption laws may allow you to protect some or all of your compensation.

How Personal Injury Settlements Are Treated in Bankruptcy

When you file for bankruptcy, nearly everything you own becomes part of what is called the bankruptcy estate. This includes bank accounts, property, vehicles, and any legal claims or settlements you have. Your personal injury settlement, whether you have already received it or are still waiting for payment, is considered an asset of this estate.

In Chapter 7 bankruptcy, a trustee is appointed to review your assets and determine what can be sold to pay your creditors. In Chapter 13 bankruptcy, you keep your property but must pay creditors the value of your non-exempt assets through a repayment plan over three to five years.

The key to protecting your settlement lies in bankruptcy exemptions. These are laws that allow you to shield certain property from creditors so you can maintain a basic standard of living and have the resources needed for a fresh start.

Federal Bankruptcy Exemptions for Personal Injury Awards

Federal law provides specific protections for personal injury settlements under 11 U.S.C. Section 522. These exemptions apply in states that allow debtors to choose between federal and state exemption systems.

Under the federal exemptions effective through April 2028, you may protect up to $31,575 of compensation received for personal bodily injury. However, this exemption does not cover amounts allocated to pain and suffering or to compensation for actual monetary losses, such as lost wages.

Additionally, federal law fully protects any award for loss of future earnings to the extent reasonably necessary for your support. Compensation for the wrongful death of someone you depended on for support and payments received under crime victim reparation laws are also fully protected regardless of amount.

The Wildcard Exemption

One of the most valuable tools for protecting personal injury settlements in bankruptcy and personal injury situations is the federal wildcard exemption. This exemption allows you to protect any property of your choosing up to a certain dollar amount.

The federal wildcard exemption consists of two parts: a base amount of approximately $1,700 plus any unused portion of the homestead exemption up to about $15,400. If you do not own a home or have little equity in your residence, you may have a significant wildcard amount available.

You can combine the wildcard exemption with the personal injury exemption to protect a larger portion of your settlement. For example, if you receive a $45,000 personal injury award, you could potentially protect the full amount by using both exemptions together—$31,575 from the personal injury exemption and the remainder from your wildcard.

State Exemption Variations

Not every state allows residents to use federal bankruptcy exemptions. Under federal bankruptcy law, about 20 states, plus the District of Columbia, give debtors a choice between federal and state exemptions. The remaining states require residents to use only state exemptions.

State exemptions for personal injury settlements vary dramatically. Some states, like Texas and Florida, offer strong protections that may shield your entire settlement from creditors. Other states provide limited or no specific exemptions for personal injury awards.

If your state requires you to use state exemptions and those exemptions do not adequately protect personal injury awards, you may lose a significant portion of your settlement to creditors. This makes it essential to understand the specific laws in your state before filing for bankruptcy.

Timing Considerations

The timing of your bankruptcy filing relative to your personal injury case can significantly affect what happens to your settlement. Understanding how bankruptcy and personal injury claims interact in terms of timing is crucial to protecting your compensation.

If you file for bankruptcy before your personal injury case is resolved, you must disclose the pending lawsuit as an asset. The bankruptcy trustee then has an interest in the outcome of that case. Depending on the exemptions available, the trustee may be entitled to a portion of any settlement or verdict you receive.

Filing for bankruptcy after receiving a settlement presents different challenges. If you still have the money in your bank account, it is clearly an asset of the estate. Even if you have spent some of the settlement, you may need to account for how those funds were used.

Some people consider waiting to file for bankruptcy until after they receive and spend their personal injury settlement. However, this strategy can backfire. Spending settlement funds on non-essential items before filing bankruptcy could be considered fraud or abuse, potentially resulting in the denial of your discharge or other serious consequences.

Chapter 7 vs. Chapter 13 Considerations

The type of bankruptcy you file affects how your personal injury settlement is handled. In Chapter 7 bankruptcy, non-exempt assets are sold by the trustee, and the proceeds are distributed to creditors. If your settlement exceeds your available exemptions, you could lose the excess amount.

Chapter 13 bankruptcy works differently. You keep all of your property, but you must pay unsecured creditors at least as much as they would have received in a Chapter 7 case. If you have a large non-exempt settlement, your monthly plan payments may need to be higher to account for this value.

Chapter 13 may be preferable in some bankruptcy and personal injury situations because it allows you to keep your settlement funds while repaying creditors over time. This can be especially important if you need the money for ongoing medical care or to cover living expenses while you recover from your injuries.

Disclosure Requirements

One of the most important rules in bankruptcy is complete honesty on your paperwork. You must disclose all assets, including any personal injury claims or settlements, on your bankruptcy schedules. Failure to disclose these assets can result in serious consequences.

If you fail to list a pending personal injury lawsuit and later try to pursue that claim, you may be barred from recovering anything. Courts have ruled that debtors who hide assets in bankruptcy cannot later benefit from them. This is known as judicial estoppel.

Even if you are not sure whether you have a valid personal injury claim, it is better to disclose it and let the trustee evaluate whether it has value. Your bankruptcy attorney can help you properly list all potential claims and explain how the exemption system applies to your specific situation.

Conclusion

Navigating bankruptcy and personal injury claims together requires careful planning. Federal and state exemptions may protect some or all of your settlement, but the rules vary by location and circumstances. Consulting with a bankruptcy attorney can help you understand your options and protect your compensation.