Part 1: When A Plaintiff Files For Bankruptcy
When a plaintiff in a personal injury or medical malpractice case needs to file for bankruptcy, usually a chapter 7 (also known as “liquidation”), this has specific consequences for the posture of the personal injury or medical malpractice case. Below, I will discuss what happens in this situation, and what the plaintiff’s attorney needs to know in order to bring that action to a successful conclusion.
The Plaintiff Is The Debtor
First of all, the plaintiff becomes a plaintiff and also a debtor in bankruptcy. The plaintiff/debtor will have what is known as a bankruptcy “estate.” Secondly, the personal injury or medical malpractice claim itself, regardless of the estimated value of the claim, will need to be listed as an asset of the bankruptcy estate.
The plaintiff/debtor’s bankruptcy attorney will list the claim on Schedule A/B of the bankruptcy petition and schedule it as personal property. The claim is entitled to exemptions, which means that, depending on the value of the claim, the plaintiff/debtor may be able to keep the entire amount of the claim (subject, of course, to liens, expenses, and legal fees). The value of the exemption depends on the plaintiff/debtor’s jurisdiction, the value of the plaintiff/debtor’s other assets, along with certain other factors. Speak with the plaintiff’s bankruptcy attorney to determine the amount of the exemption.
In addition, if a plaintiff/debtor fails to list the personal injury or medical malpractice claim on Schedule A/B, the defendant in the personal injury or medical malpractice claim can move the state court to dismiss the action for failure to include it in the schedules.
Therefore, it is prudent for a personal injury or medical malpractice attorney to ask at intake, and periodically throughout, if the plaintiff has or is filing for bankruptcy. If so, the plaintiff’s attorney should immediately reach out to the bankruptcy attorney to discuss and make sure the claim is properly listed on Schedule A/B, and that the correct exemption is claimed.
Plaintiffs/debtors do not always tell their personal injury attorney when they are filing bankruptcy, and do not always tell their bankruptcy attorney that they have a personal injury or medical malpractice claim. A little due diligence can save a lot of trouble later on.
When To Bring Up The Subject of Bankruptcy?
Therefore, it is prudent for a personal injury or medical malpractice attorney to ask at intake, and periodically throughout, if the plaintiff has or is filing for bankruptcy. If so, the plaintiff’s attorney should immediately reach out to the bankruptcy attorney to discuss and make sure the claim is properly listed on Schedule A/B, and that the correct exemption is claimed.
Plaintiffs/debtors do not always tell their personal injury attorney when they are filing bankruptcy, and do not always tell their bankruptcy attorney that they have a personal injury or medical malpractice claim. A little due diligence can save a lot of trouble later on.
After the filing of the chapter 7 bankruptcy, a panel Trustee is assigned by the Office of the United States Trustee to act as the Trustee for the case. Part of the Trustee’s duties in a chapter 7 bankruptcy is to determine if the debtor owns any nonexempt assets, including the personal injury/medical malpractice claim, which can be used to pay the plaintiff/debtor’s creditors. In order to carry out these duties, the chapter 7 Trustee will need to speak with the plaintiff/debtor’s personal injury attorney to determine the estimated value of the injury claim.
Typically, the Trustee will want information such as a description of the accident, issues of liability, the injuries suffered, any medical treatment and surgeries, any lien information, the insurance cap, if applicable, and the handling attorney’s estimated value of the case. Based on this information, and the amount of the exemption, the Trustee will determine if he/she wants to abandon the claim, or take over the personal injury/medical malpractice claim and use the non-exempt portion to pay the creditors through chapter 7. If the Trustee decides to abandon the personal injury or medical malpractice claim, then the case may continue in the normal manner, and the plaintiff/debtor may keep the entire settlement balance after expenses and legal fees and any liens are deducted.
If the Trustee determines that it is in the best interests of the bankruptcy estate not to abandon the claim, then the Trustee will take over the personal injury case by stepping into the shoes of the plaintiff. This will likely change the name of the plaintiff in the caption to the name of the Trustee. Also, the Trustee will need to apply to the bankruptcy court for permission to hire the personal injury attorney as special counsel to represent the Trustee as the new plaintiff for the personal injury case. This is a simple application to the bankruptcy court, and the Trustee will need the full cooperation of the personal injury attorney.
What is the Role of the Trustee?
At this juncture, the Trustee becomes the client of the personal injury attorney, NOT the original plaintiff/debtor. The personal injury action becomes property of the bankruptcy estate and is vested in the Trustee.
The Trustee may hire any attorney he/she chooses to prosecute the personal injury or medical malpractice case, but generally will hire the existing plaintiff’s attorney, unless that attorney does not cooperate with the Trustee. Therefore, it is always in the personal injury attorney’s best interests to cooperate fully with the Trustee. When it comes time for a personal injury or medical malpractice case to settle, it is the Trustee, not the plaintiff/debtor, who decides whether or not to accept the settlement, in consultation with the personal injury or medical malpractice attorney as special counsel.
When the personal injury or medical malpractice case does settle, if the claim was not previously abandoned by the Trustee, then the settlement and the special counsel’s legal fees need to be approved by the bankruptcy court. Upon approval, the gross settlement check is payable to the trustee.
Then, the trustee will take the gross settlement and the personal injury attorney gets reimbursed for the expenses off the top and gets their court-approved legal fees. The original plaintiff/debtor will keep the exempted value of the settlement (minus bankruptcy court-approved liens, if any), and the remainder of the settlement is used to pay administrative expenses of the bankruptcy estate (including the Trustee’s commission and the fees and expenses of the Trustee’s general counsel), and to distribute the balance to the plaintiff/debtor’s creditors. After distribution to the creditors, any remaining debt scheduled in the bankruptcy will most likely be discharged, depending on the type of debt.
Failure to cooperate with the Trustee and failure to turn over proceeds of the personal injury or medical malpractice action can have serious consequences for the plaintiff’s attorney and the plaintiff/debtor. The Trustee is there to work with the plaintiff’s attorneys, not against them. Therefore, full cooperation with the Trustee is essential. It is of note that when a plaintiff files a chapter 7 bankruptcy, the automatic stay in bankruptcy does not apply to the plaintiff’s personal injury or medical malpractice claim. However, if a defendant in a personal injury or medical malpractice action files for bankruptcy, the automatic stay does apply to the underlying action until such time as the stay is lifted by the bankruptcy court. This will be discussed in more detail in Part 2 of this series.