The debtor’s right to sue someone is an asset of the debtor and the bankruptcy estate. In other words if a debtor is involved in an auto accident or slip and fall, whereby he can sue another person for money is an asset of the bankruptcy estate. The fact that the debtor did not yet received the money is irrelevant.
In a chapter 7 and 13, the personal injury lawyer must be appointed by the Bankruptcy Court. The debtor in a chapter 13 and the trustee in a chapter 7 will submit to the court an Application to Appoint Counsel. Additionally, prior to the resolution of the personal injury case, the Court must approve the settlement and the disbursement of the proceeds.
The debtor is entitled to exemptions in the amount of $22,500 with regard to the settlement proceeds representing pain and suffering for the injury. This means that after the personal injury attorney’s fees are paid, the debtor will receive $22,500.00, to keep for themselves. Any proceeds received in excess of the attorney’s fees plus $22,500.00 will be paid to the creditors, pro rata. In the event that the creditors are paid 100% of their debt, the debtor will then receive the excess proceeds to keep for themselves.
Any settlement proceeds representing lost wages may be kept by the debtor, as all the proceeds are exempt. Additionally, any funds received from the debtor, in connection with the worker’s compensation case, may be kept by the debtor for themselves.
Generally, the personally injury case settles months or even years after the Order of Discharge. The lawyer must contact the trustee at the time of the settlement. Thereafter, the chapter 7 trustee will file the appropriate papers with the court and administer the proceeds of the case. All creditors will be notified to file a claim with the court, which reflects the amount due. The trustee will disburse the settlement proceeds accordingly.
Typically, a Chapter 13 case will be resolved while the debtor is in a pending bankruptcy case. During the bankruptcy case, the personal injury settlement proceeds will be disbursed accordingly. Thereafter, the debtor may be required to modify their Chapter 13 plan and monthly payments, pursuant to the bankruptcy code.
Consulting a Bankruptcy Lawyer
Bankruptcy attorney Robert Manchel of the Law Offices of Robert Manchel has nearly 20 years experience handling bankruptcy cases in New Jersey. If you are facing bankruptcy in NJ, contact us at 866.503.5655 or fill out our online contact form, for a free case evaluation.