Wednesday, June 5, 2013

Federal Personal Injury Exemptions in Bankruptcy

Personal injury claims can often be protected in bankruptcy.  However, it is important to know and use all the available sections of the Bankruptcy Code to exempt a debtor’s right to receive money from a personal injury claim.  In Massachusetts, multiple federal exemptions can be "stacked" in different ways to protect as much of a personal injury case as possible.

The most straightforward federal exemption is 11 U.S.C. section 522(d)(11)(D).  This section allows the exemption of $20,200 of proceeds for personal injury claims in bankruptcy.  However, it will not protect payment “for pain and suffering or compensation for actual pecuniary loss.” This exemption has been interpreted in Massachusetts to permit exemption for “bodily injury” and “loss of freedom or function.” See In re Martinez-Whitford, 199 BR 74 (Bankr D.Mass. 1996).  This includes settlement proceeds for fractures, scarring and partial disability, but not compensation for pain and suffering.

There are other, less-obvious sections in the Bankruptcy Code that can be used to exempt proceeds related to personal injury cases.

Section 522(d)(11)(E) provides an exemption for payments for the loss of future earnings, to the extent needed for the support of the debtor or the debtor’s family.  If you are considering bankruptcy and have a pending personal injury case, it is a good idea to retain a bankruptcy lawyer to work with your personal injury lawyer.  This is because the settlement agreement matters.  The way a settlement agreement is drafted can make a big difference in how settlement funds will later be treated in a bankruptcy.  This exemption can be used to protect some personal injury settlements meant to compensate the debtor for lost future wages.

Section 522(d)(11)(B) permits an exemption for wrongful death awards.  This is limited to the amount of money needed for the support of the debtor or the debtor’s family.

Section 522(d)(10)(C) allows an exemption of the debtor’s right to receive a disability, illness, or unemployment benefit, with no limit on the dollar amount.  This can be used to cover insurance benefits if based upon the debtor’s inability to work after an injury.

Of course, there is also the “wild card” exemption of Section 522(d)(5) of the Bankruptcy Code, which can be used for anything, and so also for personal injury awards.  However, the dollar cap of this exemption is about $11,000.