How Bankruptcy Affects Personal Injury Claims

Here is an outline that I presented at the Georgia Trial Lawyers Association Annual seminar in 2012.

What Injury Lawyers Need to Know About Bankruptcy Law:  How to Proceed When a Bankruptcy Case Affects Your Client’s Personal Injury Claim

There are four main principles of bankruptcy that impact a personal injury case. The principles are assets, disposable income, the automatic stay, and discharge of debt.  If the injured plaintiff files bankruptcy, then assets and disposable income are the most important principles of analyzing your client’s circumstances as a whole.  If the defendant tortfeasor is the person (or entity) who files bankruptcy, then the principles of the “automatic stay” and the discharge of debt are vital for the plaintiff’s attorney to understand.

In order to really grasp what happens when the plaintiff in an injury case or a defendant in an injury case files bankruptcy, a personal injury attorney must understand what bankruptcy is and the basic types of bankruptcy.

BASIC PRINCIPLES OF BANKRUPTCY

What is bankruptcy?  Bankruptcy is the legal status of a person who seeks protection from the bankruptcy court in order to repay or eliminate debt.

1.  Types of Bankruptcy:  Chapters 7, 13, 11

  • Chapter 7.  Liquidation.  List everything you own and everything you owe.  All assets are subject to liquidation or sale by a Chapter 7 trustee.
  • Chapter 13.  Reorganization (individual).  Repayment of debt based on income.  All disposable income, including proceeds from an injury settlement/verdict, must be paid into the case.
  • Chapter 11.  Reorganization (corporate).  Repayment of debt based on business income.

2.  Assets:  Bankruptcy Estate.  When someone files bankruptcy, a “bankruptcy estate” is created and is defined as “all legal or equitable interests of the debtor in property as of the commencement of the case.”  11 U.S.C. § 541(a)

That means a debtor’s assets come into play and belong to the bankruptcy estate.  Personal injury or workers’ compensation claims become part of the bankruptcy estate, which is a separate entity from the person who filed bankruptcy. 

3.  Bankruptcy trustee.  The trustee is the person who is assigned to oversee and administer the bankruptcy estate.  The trustee’s job is to investigate whether the estate has any assets that can be liquidated to repay creditors.

4.  Disposable Income.  Whether a debtor should repay debt or not is based partially on how much disposable income s/he has.

5.  Automatic Stay.   The automatic stay is an injunction that prevents creditors for seizing property of the estate or taking actions to seize such property.  11 U.S.C. § 362.  The primary goal of the stay is to prevent creditors from making an uncontrolled dash for the debtor’s assets and to allow the bankruptcy trustee to have an organized way to equitably distribute assets.

Assets of the bankruptcy estate are protected against creditor actions.  Thus, actions against the debtor are stayed pursuant to 11 U.S.C. § 362, but not actions BY the debtor (ie. if your injury client files bankruptcy, then the stay is not going to apply the injury claim).  Creditors cannot:

  • proceed with service, discovery, litigation, trial, enforcement of judgments, and perfection of liens against a debtor who has filed bankruptcy without court permission.
  • Exceptions include actions to enforce domestic support obligation or criminal proceedings or where the debtor has abused the bankruptcy code to frustrate creditors (ie. third filing within a year). 
  • Actions taken against debtor in violation of stay are usually voidable.

6.  Discharge.  Debtors who successfully complete a bankruptcy case receive a discharge order, which states that they no longer owe the debts listed.

  • Dismissal is not the same.  Dismissal resets everything.

WHAT TO DO WHEN YOUR CLIENT FILES BANKRUPTCY

When an injury client files bankruptcy, assets and disposable income are the main issues under such circumstances.

1.  Should I advise my injury client NOT to file bankruptcy?    

You should evaluate the client’s financial circumstances.  Is there anything imminently harmful your client, such as a garnishment or foreclosure?  If so, s/he may not be able to avoid bankruptcy.

If there is no imminent financial threat to your client, it may be strategically better to wait for the settlement of the injury claim before filing bankruptcy, especially if it is a small claim.

2.  Do I have to list the injury claim on the bankruptcy?

  • When did the claim arise?
  • Use date of accident/injury not date of suit
  • What type of bankruptcy case did your client file?
  • Chapter 7 vs. Chapter 13
    • Chapter 7:  Claims that arose before your client filed Chapter 7 are required to be disclosed as an asset.  However, claims that arose after the filing of the Chapter 7 case are not considered a part of the bankruptcy estate and do not have to be disclosed.  Reagan v. Lynch, 241 Ga. App. 642, 524 S.E. 2d 510 (1999).
    • Chapter 13:  Claims arising before or during the pendency of the Chapter 13 bankruptcy case must be disclosed as an asset.  If the claim arises after the case has already been filed, you must amend the debtor’s Schedule B to disclose the claim.
  • Judicial estoppel:  Where you fail to list an injury claim as an asset in a bankruptcy petition, the claim could be precluded by judicial estoppel because the assertion that there is no asset in the bankruptcy case would be inconsistent with the latter assertion of the injury claim. 
    • Avoid this issue by:
      • Always asking your clients if they have filed bankruptcy;
      • using the court’s PACER system to search for a bankruptcy filing by your client’s social security number; and,
      • making sure to get it through your clients’ heads that they need to tell you when they even THINK about filing bankruptcy.

3.  What if my client failed to list the injury claim in his/her bankruptcy but the bankruptcy case is not closed yet?

  • Amend the schedules to disclose the claim.
  • What if bankruptcy case has already been closed?
    • TIMELY amend schedules to disclose claim.   Clark v. Perino, 235 Ga. App. 444, 509 S.E.2d 707 (1998).
    • Judicial estoppel could apply if you have not amended the schedules before the trial court grants a motion for summary judgment based on judicial estoppel.

4.  Discharge vs. dismissal

  • Discharge is final order forgiving debtor of all debts.  Judicial estoppel applies if your client got a discharge order.
  • Dismissal is order dismissing debtor from bankruptcy case.  Dismissal does not wipe out the debtor’s liabilities.  Thus, it restores all property back to the debtor, and can avoid judicial estoppels.

5.  Can I proceed with my client’s injury claim if s/he files bankruptcy?

Yes, you can, but you need to file a motion for approval as special counsel. 

6.  Will my fees get paid if my injury client files bankruptcy?

Yes, so long as you file a motion for approval of settlement and Fee application.

7.  Can my client keep any proceeds of injury settlement/judgment if s/he is in bankruptcy?

Your client can keep a portion of the settlement, as personal injury claims have an exemption from liquidation of $10,000.00.  Any funds in excess of the exemption must be paid into the case.  Of course, if your client’s injury claim exceeds the amount of debt that the client has in bankruptcy, there will be enough money to pay all creditors and your client gets the surplus.

  • Chapter 13 vs. Chapter 7:  Although your client has the $10,000.00 exemption, if your client is in a Chapter 13 case, even the $10,000.00 exemption may be subject to having to be paid into the case as it may be considered “disposable income.” 

DOES MY CLIENT HAVE TO LIST INJURY/COMP CLAIM ON BANKRUPTCY PETITION?

When Did Claim Arise?

Chapter 7

Chapter 13

Claim Arose Before Bankruptcy

Yes.  The injury claim is an asset of the bankruptcy estate, and your client must disclose injury claim on bankruptcy petition as such. 

Yes.  The injury claim is an asset of the bankruptcy estate, and your client must disclose injury claim on bankruptcy petition as such. 

Claim Arose After Bankruptcy

No.  The injury does claim does not become part of the bankruptcy estate and does not need to be disclosed on the petition.  Reagan v. Lynch, 241 Ga. App. 642 (1999)

Yes.  Under a Chapter 13, the debtor has an affirmative duty to disclose any claim that arose after the filing of the case.  Harper v. GMAC Mortgage Corp., 245 Ga. App. 729 (2000)

WHAT TO DO WHEN DEFENDANT IN INJURY SUIT FILES BANKRUPTCY

Overview of Procedures to Follow When You Receive a Notice of Bankruptcy (or when otherwise you find out there is a bankruptcy):

  • Look at the notice of bankruptcy and calendar all deadlines.
  • File a proof of claim. 
  • File a motion for relief from the automatic stay.
  • Check to see if you should file an adversary proceeding to determine dischargeability of the claim against the defendant.

1.  The Automatic Stay:  Can I proceed with an injury claim against a defendant who files bankruptcy?  No, the stay applies to all actions to collect money from the debtor.  You and your client could be subject to sanctions and other damages for violating the automatic stay.  11 U.S.C. § 362.

  • Service:  What if you filed a case shortly before the statute of limitations runs and need to serve a defendant who filed bankruptcy?  The bankruptcy code extends the statute of limitations by the later of either 30 days from the expiration of the stay or the actual statute of limitations.  11 U.S.C. § 108(c).
  • Discovery:  You cannot proceed with discovery against a tortfeasor in bankruptcy without court permission.  You must file a motion to lift stay.
  • Trial:  You cannot proceed with trial against a tortfeasor in bankruptcy without court permission.  You must file a motion to lift stay.
  • Multi-defendant: Where there are multiples defendants, one defendant’s bankruptcy filing will not stay the entire case.  Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 544 (5th Cir. 1983).

2.  Motion to Lift Stay:

  • Grounds for lifting stay:  11 U.S.C. § 362(d)(1)
    • “Cause”-The stay can be lifted for good cause shown.  Good cause is not really defined under the statute, but here are some good reasons.  In re Sonnax Indus., Inc., 907 F 2d 1280 (2d Cir. 1990).
      • Allowing the state court to liquidate the claim when it’s already been significantly litigated;
      • Insurer will cover loss and plaintiff/your client suffered and it will not pose harm to the debtor/defendant’s estate;
      • Not allowing your client/plaintiff to proceed will cause harm to the plaintiff;
      • Bankruptcy court does not have jurisdiction to liquidate personal injury and wrongful death claims.  28 U.S.C. § 157(b)(2)(B);  and,
      • Your client/plaintiff has the right to a jury trial that is expressly reserved under the bankruptcy court (28 U.S.C. § 1411(a)), and bankruptcy courts cannot conduct jury trials without special designation by the district court and the consent of all parties.  28 U.S.C. § 157(e).
      • For a run of the mill clear liability, clear coverage injury case, using the grounds that there is insurance coverage will be sufficient to get the stay lifted.  You can state that your plaintiff/client is only looking to recover insurance proceeds from the defendant and that recovery will not hurt the bankruptcy estate.  You can also specifically state that your plaintiff/client will forego any prospect of recovering from the bankruptcy estate.
        • However, where insurance coverage is partially based on a self-insured retention requiring the debtor-defendant company to pay the first layer of coverage, it is going to be difficult to lift the stay.  Special rules apply where the defendant-debtor is a interstate motor carrier subject to the MCS-90 endorsement; there, the stay may be lifted.
        • Beyond insurance coverage:  It is unlikely that you would be able to recover against the defendant for anything beyond insurance coverage because that would affect the bankruptcy estate.  Besides, the debtor’s debts, including the one to your client/plaintiff will be discharged.
  • What if I inadvertently violated the stay?  You can file a motion to retroactively annul the stay.  It will be similar to the motion to lift stay.
  • Will the bankruptcy court try my case?  Generally no subjection matter jurisdiction to liquidate personal injury tort or wrongful death claims.  28 USC § 157(b)(5).  Your client/plaintiff has a right to trial by jury, and bankruptcy court judges are not Article III judges.   District court could decide but generally bankruptcy courts think state court judge’s are best equipped to liquidate injury claims.

3.  Proof of Claim:  A proof of claim is a court document that a creditor files to show that the creditor has a claim against the debtor.  Proofs of claims are filed in Chapter 7 cases where there are assets to be liquidated and in all Chapter 13 cases.  Filing a proof of claim within the debtor’s bankruptcy case is important to preserving your claim and in getting paid if there is money to be paid.  The deadline is 90 days from the date of the filing of petition.  If you are able to lift the stay to collect insurance proceeds, then you should withdraw your proof of claim against the debtor. 

4.  Discharge of Debtor Liability:  If your injury client’s claim is listed on the bankruptcy petition (even if it’s not and you have notice), then the debt will be discharged or wiped out at the end of the case, absent a showing that the debt is not dischargeable in an adversary complaint, which is discussed below.

5.  Adversary Proceeding:  If your claim against the bankruptcy debtor/defendant in your injury case is based on fraud, criminal actions such as DUI, or willful and malicious injury, you should file adversary complaint to argue that this debt is nondischargeable (meaning you can recover against the debtor/defendant personally, even beyond the amount of available insurance).  11 U.S.C. § § 523(a)(2), (a)(4), (a)(6), (a)(9).  You probably would not really want to file this adversary proceeding unless you could actually collect a judgment against the tortfeasor beyond the amount of insurance available. 

6.  Dismissal of Debtor’s Bankruptcy Case:  Note that dismissal is different from discharge.  Dismissal means the case is gone, and the bankruptcy protection is gone.  All of the assets of the bankruptcy estate are restored back to the debtor.  Then, you can proceed normally against the defendant in your injury case.