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How Defendants May Use Bankruptcy to Avoid Paying Judgments

Defendants in personal injury lawsuits can end up owing the plaintiff a significant amount of compensation, whether as part of a settlement or as a consequence of a court judgment. In simplified terms, the successful plaintiff becomes a creditor of the defendant. One concerns that successful plaintiffs may have is that defendants may seek to reduce or eliminate their debt obligation by discharging it through personal bankruptcy.

There are several kinds of bankruptcy, which are named after the applicable chapter of Title 11 of the U.S. Code, also referred to as the U.S. Bankruptcy Code. For individuals, the two forms of bankruptcy are Chapter 7 and Chapter 13. The mechanisms and requirements of these two forms of bankruptcy are quite different.

  • Chapter 7 bankruptcy is for debtors who lack the income necessary to pay at least some of their debts. If the debtor is already barely staying afloat when the judgment comes down, Chapter 7 might be available. A Chapter 7 bankruptcy forces the debtor to sell off or surrender property for which there isn’t an exemption. The debtor uses the resulting proceeds to pay off as much of the debts as possible, leaving only a small, exempted amount for the debtor’s own use. After the debtor has paid what he or she can, the rest of the debts are discharged. At the end of the process if a creditor cannot be paid because there is nothing left, the creditor may be out of luck.
  • Chapter 13 bankruptcy is the option available for people who do not satisfy the debt-to-income requirements of Chapter 7. Chapter 13 is more favorable to plaintiffs because it does not result in debts being discharged for good. Instead, the Chapter 13 debtor is required to adopt a repayment plan that is compatible with the debtor’s income. A Chapter 13 repayment plan is overseen by the bankruptcy court and a trustee, and may last up to five years.

Both types of personal bankruptcy involve all of the debtor’s credit obligations, meaning the plaintiff’s award gets thrown in with other forms of debt, like mortgages and car payments. One consequence of this is that the successful plaintiff may end up behind other, higher priority creditors in the process. For example, if a mortgage lender has a lien on the debtor’s home, the home’s value may be out of the plaintiff’s reach. A personal injury plaintiff is a sympathetic creditor and may receive some discretionary priority from a bankruptcy court, but the law of secured debt can limit the size of the potential asset pool available to pay all creditors.

Plaintiffs in drunk driving cases should note that bankruptcy law prohibits bankruptcy courts from discharging debts associated with injuries caused by drunk drivers. Such debts are on a list of nondischargable debt that also covers student loans, most taxes, and government debts.

Bankruptcy is designed to ensure that the debtor does not come out of the process with nothing. The idea is that debtors get another chance to “start again.” For a personal injury plaintiff this can feel unfair, especially in a Chapter 7 bankruptcy case where the debt ends up wiped away. As a consequence, plaintiffs’ attorneys need to anticipate the ability of the defendant to pay as part of their legal strategy. For example, it may make strategic sense to enter into a settlement with provision for securing the debt voluntarily, so it is harder to discharge through bankruptcy.

The law firm of Greenman Goldberg Raby Martinez has helped injured clients in the Las Vegas area recover compensation for over 45 years. If you have questions about your personal injury case, call us today for a free attorney consultation at 702-388-4476 or send us a request on our contact page.