If the personal injury ("PI") claim arose prior to filing the bankruptcy case, the debtor must disclose the claim in his or her bankruptcy schedules that a pre-bankruptcy PI claim exists. Every bankruptcy debtor must elect either the Federal or State exemption when they file their schedules, and these exemptions provide lists of items which are protected by law from the debtor’s creditors (and the Chapter 13 Trustee) in bankruptcy. The exemptions that are available are dependent on where you lived prior to filing bankruptcy. In Nevada, Personal injury awards valued at up to $16,150.00 are exempt. (Nev. Rev. Stat. § 21.090(1)(u)). Nevada also has "Wildcard" exemption wherein the Debtor can exempt up to $10,000.00 of any personal property of the debtor's choice (no real estate). (Nev. Rev. Stat. § 21.090(z).
By properly exempting the pre-petition claim (or as much of it as the applicable exemptions will allow), the debtor will get to personally keep the maximum amount of the settlement or judgment proceeds once the case settles or is reduced to judgment.
Your bankruptcy counsel will also need a complete list of any creditors (anyone who could have a claim against you or the proceeds of the lawsuit) to include in the Bankruptcy case (this includes any medical bills). We will also need to know from your Personal Injury Attorney if any of the claims are secured by a statutory lien.
A PI attorney has to be 'employed' by the Bankruptcy Court as the debtor’s personal injury attorney. This is something the debtor’s bankruptcy attorney can handle for you (*see below), or the PI attorney can handle. If the PI attorney fails to get approved for employment in a timely manner, you may not be able to collect any of your fees.
If the case settles, you must get your settlement approved by the Bankruptcy Court. The approval process is not difficult, but it may include a little coordination with the debtor’s bankruptcy attorney and some communication with the Chapter 13 Bankruptcy Trustee.
If the case goes to a successful verdict and your PI Attorney is able to collect the entire judgment on the your behalf and are now ready to begin disbursing the proceeds, you will need to notify our office and a motion to approve the settlement must be filed with the bankruptcy court to obtain approval of any expected disbursements prior to them being made. Note that general unsecured creditors of the debtor may or may not get paid anything from the proceeds of the settlement.
Finally, once the bankruptcy court approves any settlement and issues its order directing how the proceeds of the settlement or judgment are to be disbursed, the settlement funds can be disbursed. It is not unusual for some portion of the settlement proceeds to go to the Trustee for distribution to creditors. It depends on the amount of the settlement and whether or not the exemption covers the entirety of the amount going to the Debtor.