How Are Personal Injury Claims Filed After Chapter 13 Handled?

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We wrote last week about how personal injury claims are treated in bankruptcy. If you know you have a claim (or the potential for a claim), you have to tell your attorney up front – no matter if you’re filing Chapter 7 or Chapter 13. This is important because there is the potential for compensation and depending on what the compensation is awarded for, it may be an asset the Trustee can use to help pay off some of your creditors. But what happens if you’re in an accident after you filed bankruptcy and are already well on your way to having your discharge or deep into your chapter 13 repayment period?

The Flugence v. Axis Surplus Insurance Case

A recent court case has explored what should happen if a personal injury claim arises after a chapter 13 is filed. The 5th Circuit Court of Appeals Court relates to debtor Cheryl Flugence. She filed for chapter 13 bankruptcy back in 2004 and her repayment plan was confirmed. Three years later, in 2007, she was injured in a car accident and filed a personal injury claim in March of 2008. Her repayment plan ended in November of 2008 and her remaining debts were discharged.

Flugence never disclosed to the bankruptcy court that she had been injured and intended to pursue an injury claim – but she did disclose it to her bankruptcy attorney who advised her she was not required to disclose. The bankruptcy court made a ruling and the district court reversed it. The ruling we discuss today is the one that matters – the appeals court ruling - because it trumps all of the lower court rulings.

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How Flugence Ended Up in the Hot Seat

When Flugence filed a personal injury claim for her accident, the defendants discovered she had filed bankruptcy and digging further found that she hadn’t disclosed the claim to the court. They asked the bankruptcy court to reopen her case and to block her from pursuing the claim on the basis that she wasn’t entitled to pursue the claim because of the lack of disclosure.

The bankruptcy court agreed with the defendants and blocked Flugence from pursuing her injury claim but ruled that the Trustee could opt to pursue the claim to collect funds on behalf of creditors. The appeals court said Flugence could file the claim and that she had done nothing wrong because the accident occurred after her filing and her plan acceptance.

How the Case Ended Up in the District Court of Appeals

The defendants pushed back into appeal and said the debtor should have been blocked from pursuing the claim and if the claim was pursued by the Trustee, it should be limited to the amount Flugence owed to her creditors. The appeals court found that Flugence was properly stopped from filing the claim by the bankruptcy court. But they also ruled against the defendants on the matter of limiting the amount of her personal injury claim. As a result the Trustee can pursue the claim and if the proceeds exceed the amount owed to the creditors, Flugence would receive the excess.

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What This Means to You

If you are in Chapter 13 bankruptcy and your financial conditions change in any way including an increase in salary, a decrease in salary or an incident that makes you eligible to file a lawsuit for damages, you must disclose all of these to the bankruptcy court and your Trustee. Even though Flugence relied on the advice of her attorney who told her notification wasn’t necessary, in fact the attorney erred because this is a fuzzy point of the law.

If you’re considering filing personal bankruptcy – chapter 7 or chapter 13 – in North Carolina, contact the law offices of John T Orcutt for assistance and advice on dealing with your debt.