From time to time, our clients “own” a claim against another person at the time our client files his or her bankruptcy case. For example, let’s say a client was injured in a traffic accident 2 years ago and hired a personal injury attorney to sue the person who caused the traffic accident. Cases like that can easily take 3 to 4 years to resolve, either by going to court or by reaching a settlement agreement with the other side. So, if the client must file bankruptcy during the time the personal injury case remains unsolved, how is that handled in bankruptcy?
Unfortunately, in both Kansas and Missouri, personal injury claims are not exempt from the bankruptcy trustee. In essence, your case trustee owns that lawsuit as soon as you file your case. And, you are required to cooperate in the case by the bankruptcy code. So, the trustee will control the case and make decisions on whether or not to settle the case. If the case produces money, then that money will be taken by the case trustee and used to pay off as much of the debt as possible. If the case produces enough money to pay all claims in full, then any “leftover” money will go back to the client. However, remember that the trustee will also take a portion of any recovery.
In some cases, especially cases in which the trustee really needs the cooperation of the client to get the case resolved, the bankruptcy trustee will share a portion of the recovery with our client. However, there is no requirement for him or her to do that – it isn’t automatic. The bankruptcy code does not provide for such a split of the lawsuit proceeds, and some judges don’t like the practice of splitting the recovery with the client. But as a practical matter, it makes sense for the trustee to do so in order to keep our client interested in the case. Consequently, even though the trustee could force the debtor to stay involved, the trustee prefers to share a portion of the recovery with our client. Just keep in mind that this must be negotiated with the trustee, and some trustees will not allow it.
If you have any questions about personal injury claims and bankruptcy, please contact W M Law today.