Can the bankruptcy trustee seize my class action settlement?

Financial disclosure is paramount in filing a bankruptcy petition and can impact the chances of a discharge. In re Lana shows us that the trustee is always looking, even post discharge, for undisclosed assets and why it is important to disclose any potential lawsuit or settlement in your Schedule A/B. Today’s article will touch on personal injury claims and how they fit into the bankruptcy estate. 

Occasionally someone will receive money or property after filing bankruptcy from an injury claim. Sometimes the filer can keep it, sometimes they can’t. Whether a debtor gets to keep the money or property depends on the type of property or settlement, the date of the claim, the state’s exemption laws, and if you filed a Ch 7 or Ch 13.  In Kansas, Workman’s Compensation claims might be property of the estate but they are entirely exempt from seizure by the bankruptcy trustee.  However, most other personal injury claims are not exempt.  

If you are or think you might be involved in a personal injury claim, you need to let your attorney know and disclose the claim in your bankruptcy petition. Failure to disclose a potential claim can lead to criminal liability, you may not be able to pursue your claim, or the trustee can get the money back from you.  You could also have your discharge revoked. It is impossible to discuss every detail in this article as each case is different, but I will try to highlight things the court may look at when determining if the settlement is part of the bankruptcy estate. The best way to protect the claim is to consult with your attorney on the best way to proceed.  

Is the settlement part of the bankruptcy estate? Depends on if Ch 7 or Ch 13 case 

In Ch 7 cases, assets that exist as of the date of the bankruptcy petition filing become part of the estate and may be distributed to creditors. This means if you are in a personal injury lawsuit before you file the petition, the settlement from the lawsuit may become part of the estate, even if you have not received it yet. It also means that if a personal injury accident occurred before filing and you had a right to sue, but haven’t yet, it could become part of the estate. If the accident occurred after the filing of the petition it will not be property of the estate and therefore not seized by the bankruptcy trustee.

In Ch 13 cases, assets that you receive after you file the petition, but while you are completing your plan are part of the bankruptcy estate and may be used to pay your creditors. You are required to disclose the personal injury lawsuit to the bankruptcy court, your bankruptcy attorney, and your personal injury attorney will need to contact your bankruptcy attorney if they do not know how to proceed.  We will discuss in a later the procedure personal injury attorneys must follow when representing a client involved in a bankruptcy.  

Facts of In re Lana 

Debtors filed a chapter 13 petition 7 years ago, completed their plan payments, and received a discharge. A year after their discharge, the US Trustee filed a motion to reopen the debtor’s case. The Trustee alleged one of the debtors had underwent a surgery before the bankruptcy petition was filed and is entitled to receive the proceeds of a personal injury settlement stemming from that surgery, worth roughly $7500.  

How did the trustee find out about the settlement? 

This particular personal injury claim was a class action transvaginal mesh lawsuit. After a class-action lawsuit is resolved, a claims administrator often handles the administration process in compliance with the court ordered settlement agreement. When the administrator is distributing settlement awards, they often look to see if any recipients have filed a bankruptcy in the past 8 years before distributing the settlement. If they come across a recipient that has filed a bankruptcy, the administrator gives notice to the trustees office to notify them of the settlement.  

Is this particular settlement part of the estate? 

Sometimes people do not even know they are part of a class action lawsuit until the case has been settled. The court in Kansas notes that the awareness of the injury and when the debtor joined the class action are part of determining whether or not the claim is part of the bankruptcy estate. The trustee must include specific facts that indicate the settlement is property of the estate and what it wants in this specific situation. For example, the court would like to know: what the net settlement amount would be, when the debtor discovered the injury and when she filed her claim, and what does the trustee want in this situation (turnover, revocation of discharge?). Here, those questions were not answered and the court was unable to make a determination on information they did not have.  

The trustee must endure a hard path to reopen a completed chapter 13 case that has already been discharged. In this case, a modification of a plan this late is probably not possible, and the court notes the 10th circuit has not addressed this timing issue. Other circuits have stated that if a debtor has paid his plan balance the trustee cannot modify the plan to account for newly acquired funds. 

Under different facts, if the bankruptcy case has not been closed, the trustee can request to modify the plan and include the settlement to pay your creditors.  You normally can retain funds for future medical expenses and you might have some ability to retain funds that are exempt (75% for lost wages) and in some cases the chapter 13 trustee will have a standard policy about retention of personal injury claims. 

Always make sure you have disclosed any potential personal injury claims you might have to your attorney so they can notify the court and the trustee.  If you have questions about bankruptcy or you need more information please reach out to our office for a free consultation.  We have bankruptcy attorneys in Wichita, Topeka, Lawrence and Overland Park.   

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