There are times when a personal injury claim is pending and the injured party files for bankruptcy during this time. A personal injury claim may or may not be protected in a bankruptcy filing and is subject to oversight by the bankruptcy court and Trustee. A personal injury attorney handling a case for a client in this situation must take certain steps to ensure they receive payment for their services, pay the proper parties, and follow the bankruptcy court’s rules and procedures.
Personal Injury claim arose before the bankruptcy filing.
If the PI claim arose before the bankruptcy filing, the debtor must disclose the claim in his bankruptcy petition. The Bankruptcy Code requires debtors to list all assets and debts on their “schedules” to show their financial condition. Even if the award amount is unknown at the time of filing, the claim must still be listed as an asset, and any award may become property of the bankruptcy estate.
There are two types of personal bankruptcy that consumers file: Chapter 7 and Chapter 13, and each handles a PI claim a little differently. If the client files a Chapter 7, it is a liquation case. This means all of the debtor’s assets are liquidated except those he is allowed to keep by law (his “exemptions”) and the rest is to be paid to his creditors. Each state has its own set of exemptions and some states allow federal exemptions to be used in a bankruptcy filing. In Kansas, a debtor must use state exemptions, and there is no specific exemption for a PI claim to protect it from the Trustee or creditors. Because there is no exemption, a Chapter 7 Trustee can step into the shoes of the debtor, settle the claim for him, and use the proceeds to pay creditors. If there is any amount leftover, the Trustee will refund the amount back to the debtor. This is important because it changes who the plaintiff is in the PI case. The real party in interest is the bankruptcy trustee acting on behalf of the bankruptcy estate. The Trustee has the authority to pursue litigation and agree to settlement amounts. The PI attorney must work closely with the Trustee and the bankruptcy attorney to make sure proper parties are paid out of the settlement and the settlement gets court approval. The Trustee can decide how to proceed, whether they will retain the PI attorney or hire a different attorney.
It is possible in a Chapter 7 case that the trustee will share some money with the debtor to obtain the debtor’s cooperation in completing the personal injury case. This of course does not apply where the trustee does not need the debtor to settle the case.
If the debtor filed a Chapter 13 case, it is a reorganization or repayment case. This means, no assets are liquidated and the debtor makes payments to creditors based on the ability to pay, family size, and the value of assets. When assets are non-exempt (such as a PI claim), the debtor must pay the value of the non-exempt asset to his creditors if he intends to keep it.
Unlike in Chapter 7, a Chapter 13 debtor can pursue the claim instead of the trustee. The PI attorney must be employed by the bankruptcy court to represent the debtor in the personal injury claim. The bankruptcy attorney can/will usually handle this for the PI attorney and let them know what documents are needed for this motion. [See discussion below on employment] The debtor will be able to make litigation and settlement decisions, but like in Chapter 7, settlements must be approved by the court.
Personal Injury claim arose after the bankruptcy filing.
In a Chapter 7 case, the claim does not become part of the bankruptcy estate and does not need to be disclosed on the bankruptcy petition and the proceeds are not subject to the Trustee’s reach. If a debtor has filed Chapter 13 bankruptcy, the debtor must let his bankruptcy attorney know of the claim and disclose the claim to the Trustee. The bankruptcy attorney will be able to make amendments to the debtor’s bankruptcy petition.
| Is the claim part of the bankruptcy estate? | Chapter 7 | Chapter 13 |
|---|---|---|
Claim arose before the bankruptcy filing | Yes, the claim is an asset of the bankruptcy estate, and must be disclosed on the bankruptcy petition. | Yes, the claim is an asset of the bankruptcy estate, and must be disclosed on the bankruptcy petition. |
Claim arose after the bankruptcy filing | No, the claim is not part of the bankruptcy estate and does not need to be disclosed on the petition. | Yes, a Chapter 13 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) |
Motion to Employ- 11 USC § 327.
A Chapter 13 debtor has the right to employ counsel so long as the attorneys (1) disclose compensation paid or agreed to be paid pursuant to 11 U.S.C.S. § 329 and (2) requests approval of post-petition payments from property of the estate pursuant to 11 U.S.C.S. § 330(a)(4)(B). It is especially important that PI attorneys file a motion to employ and related documents BEFORE beginning to provide services, or they run the risk of being unable to collect fees later, or worse they must repay the fees they collected.
| Do I need to file a motion to employ? | Chapter 7 | Chapter 13 |
|---|---|---|
Claim arose before the bankruptcy filing | No, but the claim belongs to the bankruptcy estate and the chapter 7 trustee will hire an attorney themselves to handle it. | Yes, generally the PI attorney will file a motion to employ through the bankruptcy attorney. |
Claim arose after the bankruptcy filing | No, the claim is not part of the bankruptcy estate and the PI attorney does not need court approval to take the case. | Yes, generally the PI attorney will file a motion to employ through the bankruptcy attorney. |
Contents of Fee Agreements-11 USC 329
The PI attorney providing the services will need to include a copy of the fee agreement with the motion to employ. Section 329 requires the attorney to file a statement disclosing fees and is mandatory, even if the attorney does not plan to apply for compensation later (i.e., debtor paid a flat fee as payment in full). The disclosure must include a statement of the compensation paid or agreed to be paid, the existence of a fee-sharing agreement (if with another not within the same firm), and the particulars of the fee-sharing agreement. Disclosures are required to protect the debtor from overreaching attorneys who may overcharge for their services and leave creditors without their proper share.
In addition to the fee agreement, a letter stating the PI attorney has no conflicting interests with any of the creditors listed in the client’s bankruptcy petition must also be included. A notice of the motion to employ is sent to all the creditors and if no objections, the PI attorney will likely be approved. Remember, employment approval is only the first step in the process to collect fees, and there is no guarantee the attorney’s fees will be approved for services provided after a Chapter 13 plan confirmation.
PI attorney is employed-What else is needed.
Once the PI attorney has been approved and employed by the bankruptcy court, the PI case proceeds as it normally would. The debtor and PI attorney will make litigation decisions and decide on a settlement amount. If the case settles, the PI attorney must get approval of the settlement by the bankruptcy court by filing a motion for approval of settlement BEFORE acceptance. Often, a motion to approve attorney’s fees is filed at the same time as the motion to approve settlement. If the PI attorney submitted the fee agreement with the motion to employ, the judge will likely approve both motions.
If other disbursements need to be made from the settlement proceeds, the court will also need to approve these before the PI attorney makes them. For example, the debtor may wish to retain some of the proceeds if possible. The bankruptcy attorney will be able to assist in payout options depending on individual debtors’ situations. Once the court approves the settlement, fees, and disbursements, the PI attorney can finally pay out the settlement funds to the appropriate parties.
Conclusion:
Personal injury cases while in bankruptcy will require cooperation between the PI attorney, bankruptcy attorney and trustee. Bankruptcy court can be much different than state or federal courts, but having an experienced bankruptcy attorney can help a PI attorney navigate the process and help the debtor keep the most of his PI claim.
Coons and Crump is a consumer bankruptcy law firm with offices in Kansas and Missouri. If you need any information about bankruptcy please feel free to reach out to our office for a free consultation.
