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Can I keep my lawsuit settlement after I file bankruptcy?

If you have filed a personal injury claim, car accident claim, or any other type of civil suit you may be expecting a large lawsuit settlement. Unfortunately, it can take years to receive a lawsuit settlement, especially if the case has to be settled in court. So what do you do if you are in financial straits? Should you file bankruptcy now or wait for your lawsuit settlement? What happens if you file bankruptcy now but receive a settlement after the bankruptcy case has closed and you have received your bankruptcy discharge?

Recently on our bankruptcy forum a user asked, “If I file bankruptcy and then receive a lawsuit settlement what will happen to my settlement payments?”

Assuming you file Chapter 7 bankruptcy whether or not you will be able to keep your settlement money following bankruptcy will depend on several factors: the type of lawsuit settlement received, when your claim or cause of action arose, the exemption laws of your state, and whether you filed for Chapter 7 or Chapter 13 bankruptcy.

Lawsuit settlement and filing Chapter 7 bankruptcy

If you decide to file Chapter 7 bankruptcy your assets and property are considered part of your bankruptcy estate. In fact, the bankruptcy trustee is allowed to gather your non-exempt assets and sell them to generate monies to repay your creditors.

What if you have an on-going lawsuit? If you expect payment from a lawsuit these proceeds are generally considered a legal and equitable claim of your bankruptcy estate, assuming the lawsuit is a legal cause of action at the time you file your case.

Additionally, all of these causes of action and the legal claims must be listed on the proper bankruptcy schedules. When you receive the proceeds from these claims the payments are considered property of the bankruptcy estate, even if your bankruptcy case has already been closed and your debts have been discharged.

Now the question of whether you can keep the personal injury proceeds or lawsuit settlement will depend on the exemption laws for your state and whether your state has exemptions which protect (either in part or whole) the payments for the claim. Talk to a bankruptcy lawyer who is familiar with the laws in your state for more information about your specific case.

Chapter 13 bankruptcy and a lawsuit settlement

Unlike Chapter 7 bankruptcy, if you file Chapter 13 bankruptcy the trustee does not take your assets to sell them to generate payments for your creditors. Instead, you will be allowed to create a 3 of 5 year debt repayment plan to repay your creditors all or a portion of the unsecured debts you owe. The amount you will be required to pay your unsecured creditors, however, is equal to the value of your nonexempt assets.

So what happens if you receive a nonexempt settlement during Chapter 13 bankruptcy? The court most likely will increase the amount you are required to pay your creditors for unsecured debts by readjusting your 4 or 5 year debt repayment plan.

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