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How Personal Injury Judgments Fare in Bankruptcy

When an injured plaintiff sues a defendant in civil court to recover compensation for personal injury, the plaintiff is hoping to obtain a favorable judgment. The judgment may come about after a trial, or it may be the result of a negotiated settlement. Either way, a court judgment orders the defendant to do (or not do) certain things. In a personal injury context, the judgment typically orders the defendant to pay the plaintiff or the plaintiff’s creditors (insurers, health care providers, and so on) a certain amount of money. Financially speaking, the defendant becomes a debtor to the prevailing plaintiff and others who have incurred expenses on the plaintiff’s behalf during treatment of the plaintiff’s injuries. The plaintiff, in turn, becomes one of the defendant’s creditors. This debtor-creditor relationship remains until the judgment is paid in full.

Judgment liens and other creditors

A successful plaintiff typically is not the defendant’s only creditor. Most people in the United States have multiple debt relationships: auto loans, mortgages, educational loans, credit card debt, utility bills, and so on. Not all debt is created equal. Debt can be categorized in a variety of ways, but one of the more important distinctions is between secured and unsecured debts:
  • Secured debt is tied to certain tangible collateral. Car and home loans take the car or home as collateral. Credit card companies can require a deposit of cash collateral from customers with no or low credit. Lenders in such arrangements have a straightforward remedy if the borrower fails to pay: they simply repossess the collateral property and sell it to recover the value of their loans.
  • Unsecured debt is not tied to specific property. Most credit card debt is unsecured. For a credit card company, the remedy is to keep piling on late fees and charging interest.
A civil judgment is often secured by what is called a judgment lien. A judgment lien allows the plaintiff to make a claim against the defendant’s valuable property and sources of income until the debt is paid. For example, the plaintiff can file a lien against the defendant’s home or car, ensuring that as a legal matter the home or car can’t be sold without first satisfying the debt.

The bankruptcy option

Defendants who face an unmanageable debt load will sometimes declare bankruptcy. In the most common form of personal bankruptcy (Chapter 7), a debtor is forced to sell or surrender nonexempt property to repay as much of his or her debts as possible. Creditors typically get paid in order of their priority, and here is where a plaintiff can get unpleasantly surprised. Unless the defendant has a substantial cash or liquid investment pool to draw upon, senior lenders (mortgage lenders, auto lenders, even credit card companies) may take all the defendant is required to pay before the plaintiff sees much, if anything. If a judgment lien has been attached to exempt property (for example, a defendant’s primary residence) the lien may be removed as a consequence of the bankruptcy process. Plaintiffs who face this possibility need legal representation in the defendant’s bankruptcy proceeding to ensure that every effort is made to prevent the defendant from escaping their obligation through bankruptcy. In some cases (drunk driving incidents, for example) the defendant cannot escape financial responsibility through bankruptcy. In other cases the plaintiff must argue the case, often in contention with large lending organizations.

Talk to a personal injury attorney about your case

The law firm of Greenman Goldberg Raby Martinez has represented clients in personal injury cases for over 45 years. We help plaintiffs through every phase of their civil litigation, from pretrial strategy to post-judgment collection. If you have questions about how you can collect on your civil judgment, call us today for a free, confidential attorney consultation. We’re available at 702-388-4476 or contact us through our website.

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.