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I had the pleasure of attending the Nebraska Association of Trial Attorneys seminar held at the Nebraska College of Law a week ago, and it got me thinking about how much trial attorneys need to understand about the bankruptcy process.  In a nutshell, here are seven things every trial attorney should understand about bankruptcy.

1. Injury Claims Must Be Listed as Asset on Bankruptcy Schedules.   A debtor must list all his or her property in the bankruptcy schedules.  The bankruptcy estate includes every interest of the debtor including causes of action owned by the debtor.  This is especially critical in Chapter 7 cases where all of the property of the debtor is temporarily vested in the Chapter 7 Trustee until the Trustee reviews the asset schedules and interviews the debtor.  If the injury claim is not listed as an asset, the claim remains in the possession of the bankruptcy trustee, and that means the debtor does not have standing to proceed with the injury claim after the bankruptcy case is completed.  Armed with that information, counsel for the defense may seek a motion to dismiss the injury claim if it was not listed in the bankruptcy schedules since the debtor lacks standing and such a dismissal, of course, may then cause the unpleasant topic of an expired statute of limitations on the injury claim to arise.

Do you know if your PI client filed bankruptcy?  Is that question on your client intake form?  Is that question asked again prior to trial?  If the claim was listed, how was it listed?  Have you reviewed a copy of the bankruptcy schedules?  Have you checked the federal PACER computer system for possible bankruptcy case filings?  How will you respond to a client whose case is dismissed after the statute of limitations has expired when they say “I thought you knew that I filed bankruptcy because of all those medical bills I was facing?”  

2. Personal Injury Claims are Exempt under Nebraska Law (but it may constitute Disposable Income)Nebraska Statute 25-1563.02 provides that “all proceeds and benefits,   including interest earned thereon, which are paid either in a lump sum or are accruing under any structured settlement providing periodic payments, which lump-sum settlement or periodic payments are made as compensation for personal injuries or death, shall be exempt from attachment, garnishment, or other legal or equitable process and from all claims of creditors of the beneficiary or the beneficiary’s surviving dependents unless a written assignment to the contrary has been obtained by the claimant.” Some Chapter 7 Trustees questioned whether this exemption protected compensation awarded for lost wages and medical expenses, however, the Nebraska Bankruptcy court ruled that the exemption expressly protects all proceeds and benefits including lost wages and medical expenses.  In re Rhea, BK 04-42427.

Although personal injury proceeds are exempt under Nebraska law, when a substantial settlement is received in the middle of a Chapter 13 payment plan this will open a discussion of whether the debtor is now able to pay a greater portion of their debts.  The Chapter 13 Trustee will need to be notified of the settlement and the trustee may inquire as to how the settlement will be spent.  The trustee cannot compel a turnover of the settlement, but they can seek to increase the bankruptcy payment or dismiss the case if it is apparent that not all of the funds received will be necessary to pay future medical bills or basic living expenses. 

3. Motion for Relief from bankruptcy stay required to allow litigation.   The filing of a bankruptcy petition causes a federal injunction to automatically come into existence that stays all collection efforts against the debtor, and this injunctive relief is commonly referred to as the “Automatic Stay.”    In a cause of action involving claims and counterclaims it may be necessary to obtain authority from the bankruptcy court to allow the personal injury claim to proceed.  Bankruptcy courts will commonly grant limited relief from the bankruptcy stay to allow the parties to an injury lawsuit to proceed with litigation under the provision that any settlement of the case be subject to future court approval.

4. Chapter 7 is Fast. Chapter 13 is Slow.  Which do you need?   Chapter 7 cases are completed in approximately 90 days whereas a Chapter 13 case is open for three to five years.  If a settlement of a claim is expected in the near future, most debtors are better off filing a Chapter 7 case so that they can be free of debt before they obtain possession of a large settlement.  A debtor who receives a large settlement before or during a Chapter 7 case may find that they are no longer eligible for the quick discharge if it is apparent that they have the ability to pay back some of their debt. Chapter 13 offers debtors the benefit of time.  It gives them the ability to reject low-ball settlement offers on their injury claim since they have the ability to hold off creditors while the case is pending.  Chapter 13 gives the debtor time to litigate their injury claim and to maximize their net recovery.  In addition, Chapter 13 offers flexibility in that a debtor may offer a minimal monthly payment to creditors at the beginning of the case while they are still healing from injuries or going through physical therapy and then increase the bankruptcy payment in the later years of the bankruptcy plan. 

5. Motion to Employ Counsel Required in Chapter 13 Cases.  In order to be able to be paid compensation for representing a debtor in a personal injury case it is necessary to request approval of the bankruptcy court to employ counsel.  Those lawyers who provide legal services to a debtor without seeking court approval risk having their request for compensation denied.  If you volunteer services there is no right to demand compensation.  Bankruptcy Code Section 327 provides that a debtor may, with the Court’s approval, employ one or more attorneys as long as they do not hold an interest adverse to the bankruptcy estate.  An affidavit of the personal injury attorney stating that they have no adverse interest to the estate should accompany the motion along with a copy of the legal service agreement.

6. Reaffirmation of Legal Services Agreement in Chapter 7.  What is the effect on a legal retainer agreement that is not reaffirmed in a Chapter 7 proceeding?  The simple answer is that the agreement is discharged and the compensation to be paid for services rendered to a debtor after the Chapter 7 case is filed is no longer determined by the agreement.  For this reason it is essential that the personal injury attorney either execute a reaffirmation of the original retainer agreement or sign a new retainer agreement following the completion of the Chapter 7 case. 

7. Motion to Approve Settlement:  A settlement that is reached during a Chapter 13 case must be approved by the bankruptcy court.  The claim is property of the bankruptcy estate, and a debtor is incapable to transferring or converting estate property without prior court approval.  In addition, the Chapter 13 trustee will be interested in seeing a copy of the settlement and a statement of the future medical or income needs of the debtor to determine if the debtor’s bankruptcy payment should be increased.

Image courtesy of Flickr and The May Firm.