Protecting Personal Injury Claims in Bankruptcy

The man on the television advertisement points at the camera and says, “If you have been hurt in an accident. . .” Suffering a personal injury often means that your income has been disrupted and your finances are a mess. It is an unfortunate fact that personal injury cases can take months or years to resolve, meanwhile the victim’s situation grows grim. Fortunately, federal and state exemption laws contains provisions that help a personal injury victim protect funds recovered from a personal injury.

Section 522 of the Bankruptcy Code allows the debtor to elect either federal exemptions or state exemptions to protect property (not both). However, the Bankruptcy Code also allows states to “opt out” of the federal exemptions and restrict debtors in these states to state bankruptcy exemptions only. Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Puerto Rico, Rhode Island, Texas, Vermont, Virgin Islands, Washington, and Wisconsin all allow bankruptcy debtors to use either state exemptions or the federal exemptions contained in the Bankruptcy Code. The remaining states have “opted out” of the federal bankruptcy exemptions and instead force residents to use its own set of state exemptions.

Important sections to know when exempting funds from a personal injury case under the federal exemptions are:

Section 522(d)(11)(D) of the Bankruptcy Code provides an exemption of $22,975 to protect a personal injury claim, excluding pain and suffering or actual out-of-pocket losses (careful drafting of the settlement papers, if any, is therefore necessary).

Section 522(d)(11)(A) states that any restitution in a criminal case or award from a crime victim reparation fund is exempt.

Section 522(d)(11)(B) protects payments for wrongful death of someone upon whom the debtor was a dependent are exempt “to the extent reasonably necessary” to support the debtor and the debtor’s dependents.

Section 522(d)(11)(C) exempts life insurance benefits if the debtor was a dependent of the insured and the funds are reasonably necessary to support the debtor and the dependents of the debtor.

522(d)(11)(E) protects loss of future earnings. If the payment is for loss of future earnings of the debtor or someone on whom the debtor was a dependent, the award is exempt provided that the payment is reasonably necessary to support the debtor and the debtor’s dependents.

Of course, the federal “wild card” exemption found in Section 522(d)(5) can always be applied to any portion of the debtor’s automobile accident claim.