I provide bankruptcy consultation services to attorneys. Recently, an issue was discussed that is a tale of caution to personal injury attorneys and to bankruptcy counsel. Here is the scenario: Personal injury attorney settles an action for over $700,000 and is on the brink of disbursing the settlement funds when he learns that his client has filed for bankruptcy. The settlement was the result of a mediation which took place after the petition was filed. Personal injury attorney is in a panic- how will this affect the settlement? Personal injury attorney is not the only one that has been surprised. Counsel who filed the chapter 7 is shocked to learn about the personal injury action. Based upon the information provided by the client, the case looked like a “garden variety” no-asset case. For those not familiar with bankruptcy, a debtor is required to disclose his or her assets and liabilities in the petition and this lawsuit was not disclosed to counsel and therefore, not listed in the petition. So, what we have here is an unauthorized settlement of a lawsuit which is an asset of the bankruptcy estate. When the debtor filed for bankruptcy relief, the personal injury claim became an asset of the estate. The debtor is entitled to claim an exemption up to a certain amount in connection with a personal injury award or settlement. However, in this instance, since the debtor did not disclose the personal injury claim to his bankruptcy counsel, it was not listed in the petition and no exemption was taken. Because the personal injury action is an asset of the estate, the chapter 7 trustee, who steps into the shoes of the debtor at the time of the filing, has the authority to settle the case. Personal injury attorney will need to be retained by the chapter 7 trustee to represent the trustee in connection with the personal injury action. The retention needs to be approved by the bankruptcy court. As to the settlement, it will require the consent of the chapter 7 trustee and it will also need to be approved by the bankruptcy court after notice and an opportunity to be heard has been provided to all creditors and other parties in interest. To get paid, personal injury attorney must submit a fee application and his fees also need to be approved by the bankruptcy court. The good news is personal injury attorney did not disburse any of the settlement funds before he learned of the bankruptcy filing. The bad news is there is a lot of work that needs to be done to get the settlement approved and to get paid. As to the debtor’s failure to disclose a significant asset in his petition, the debtor’s discharge may be in jeopardy. So, what is the moral of the story? Ask your client about his or her financial health periodically. Before settling an action or proceeding with trial, inquire about a possible bankruptcy filing. If you learn your client has filed for bankruptcy relief, do not proceed with the case until you contact bankruptcy counsel and the trustee assigned to the case. As to bankruptcy counsel, warn your client of the consequences of failing to disclose an asset and stress the importance of disclosure, disclosure, disclosure.
#personal injury # award #settlement #bankruptcy
Kimberly Berson has been practicing bankruptcy law for over 25 years. She has experience representing diverse interests in bankruptcy proceedings including individual and business debtors, creditors and chapter 7 trustees in chapter 7, chapter 13 and chapter 11 proceedings. She also teaches legal studies classes. You may reach her at kbersonlaw@gmail.com or 516-847-5122.
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