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If you’ve been involved in an accident that resulted in serious injuries to your person or property, you may be pursuing - or considering pursuing - a personal injury lawsuit to compensate you for your damages. If you are also involved in a bankruptcy, you should know that some aspects of your settlement may become part of the assets your Trustee can use to satisfy your debts.
As part of your initial appointment with your North Carolina bankruptcy attorney, one of the questions you will be asked is whether there are any lawsuits pending against you or on your behalf. As with income, expenses and assets, you must be 100% honest to avoid any accusations of fraud or impropriety by the court. If you are considering, or have the right to file a personal injury suit, you must mention this to your NC bankruptcy lawyer.
If your accident occurred at work and you are eligible to file a worker’s compensation claim for your injuries, any payment or settlement your receive under state or federal worker’s comp will be fully exempt. Although you should still mention this to your bankruptcy attorney, this money will not be accessible to your creditors or your Trustee to satisfy your debts.
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Non Work-Related Injuries
Even if your accident wasn’t work related, the settlement will likely be exempt. One bankruptcy ruling even exempted compensation for lost wages. If you missed work, for example, for two months and were paid damages to make up for those wages, your Trustee should not be able to access those funds to pay your creditors – subject to the exceptions listed below.
Exceptions to the Exemption
There are some exceptions to exempting your personal injury settlement. If you owe to creditors any amounts associated with the accident, they will not be exempted. For instance, if you owe legal expenses, medical or dental expenses, hospital or other health care charges associated with the accident, these creditors can pursue what you owe them while general creditors (such as credit card companies) cannot.
Precautions to Take
You should not deposit a check for a personal injury claim into your normal checking or savings account. If you commingle these funds with other monies you use to pay bills or make your payments to your Trustee (in case of a Chapter 13), you risk these funds losing their exempt status. Anytime there is a debt collection issue, mixing exempt with nonexempt funds can put exempt funds at risk!
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Also, if you use these funds to purchase an asset prior to your bankruptcy being discharged (in either a Chapter 7 or Chapter 13), that asset may become subject to seizure by your Trustee to pay your creditors unless the purchase falls under exemption. For instance, if you use the money to buy a $10,000 car, that could be seized. If you spend $700 on a television, it would likely be exempt.