The Impact of Bankruptcy on Your Car Accident Claim

What Is Bankruptcy?

Bankruptcy is a legal process that allows individuals and businesses to eliminate or restructure debt when they can no longer afford to pay their creditors. It provides a fresh start for those facing financial hardship, but can also affect legal claims, including personal injury settlements from a car accident.

When someone files for bankruptcy, their assets, income, and debts come under the control of the bankruptcy court. If you have a pending personal injury case or have already received settlement money, it may be impacted depending on the type of bankruptcy you file and when your injury claim arose.

Individuals file two main types of bankruptcy, Chapter 7 and Chapter 13. Each has different rules regarding personal injury settlements, insurance coverage, and compensation.

Chapter 7 bankruptcy

Chapter 7 bankruptcy helps individuals erase most unsecured debts, such as medical bills and credit card balances, by liquidating non-exempt assets to repay creditors. Once the process is complete, the remaining eligible debts are discharged.

If you file for Chapter 7 bankruptcy, what happens to your settlement money depends on when it was filed. Your claim may either become part of the estate, or you may be allowed to keep the entire amount.

Chapter 13 bankruptcy

Chapter 13, or reorganization bankruptcy, allows individuals to keep their assets while repaying debts through a structured plan over three to five years. Instead of liquidating assets, filers make monthly payments based on their household income.

In this case, a personal injury settlement may still be impacted. If you receive settlement money while on a repayment plan, some may need to be used to pay off debts. However, specific exemptions may protect part of your settlement, depending on your state’s laws.

What Happens to Your Car Accident Claim If You File for Bankruptcy?

Regardless of the type of bankruptcy, a personal injury lawsuit or settlement is often considered an asset in bankruptcy. Whether or not you can keep your settlement money depends on when the accident happened, the exemptions available in your state, and how the trustee handles your case.

If you filed for bankruptcy after an accident

If your accident occurred before you filed for bankruptcy, your injury claim becomes part of the bankruptcy estate. This means the bankruptcy trustee may take control of your personal injury funds and use them to repay creditors.

However, some states offer specific exemptions that allow you to keep part or all of your personal injury settlement. In some states, these bankruptcy exemptions protect medical expenses, lost wages, or compensation for pain and suffering. In other states, only a portion of the settlement money may be protected, and the court could take anything above that amount.

If your settlement is exempt, you keep it. If not, the trustee distributes it to creditors as part of the process.

If you filed before

The outcome is different if your accident occurred after you filed for bankruptcy. In Chapter 7 bankruptcy, any injury claim from an accident after filing is not part of the estate, meaning you keep your settlement money.

However, in Chapter 13 bankruptcy, even an injury claim that arises after filing may be considered when structuring your repayment plan. While you might still receive some compensation, some of your personal injury funds could go toward paying creditors.

What If the At-Fault Driver Files for Bankruptcy?

Once someone files for bankruptcy, an automatic stay is triggered. This court order halts all collection efforts, including personal injury lawsuits. If you are in a lawsuit against an at-fault driver and file for bankruptcy, your case may be put on hold until the court decides whether it can continue.

Can you still get compensation?

Insurance coverage is crucial in car accident cases, even when bankruptcy is involved. If the at-fault driver has liability insurance, their insurance company will still be responsible for covering damages, including medical bills, lost wages, and property damage.

However, if the at-fault driver has no insurance or inadequate coverage and files for bankruptcy, you are unlikely to recover additional funds from them. If available, your best option is to file a claim under your uninsured/underinsured motorist policy.

What Happens If You Already Won a Lawsuit or Settlement?

Winning a personal injury lawsuit does not always mean you will receive or keep the money—especially if bankruptcy comes into play. Whether your judgment or settlement is affected depends on who filed for bankruptcy and when.

If you were awarded a judgment before the at-fault driver filed for bankruptcy

If you won a lawsuit and were awarded a judgment before the at-fault driver filed for bankruptcy, you may face challenges in collecting the money. When a person files for bankruptcy, many debts—including court judgments—can be discharged, meaning they are legally erased, and you lose the right to collect.

However, not all car accident-related debts can be wiped out through bankruptcy. If the at-fault driver caused the accident due to drunk driving or intentional misconduct, your judgment is likely non-dischargeable, meaning you can still pursue compensation.
If their bankruptcy discharge covers your judgment, you might have limited options to recover money unless you had insurance coverage, such as uninsured motorist protection or a pre-existing lien on the at-fault party’s assets.

If you were awarded a settlement before you filed for bankruptcy

If you received a personal injury settlement before filing for bankruptcy, that money may become part of the estate, meaning it could be used to pay off creditors. Whether you get to keep your settlement depends on federal and state exemptions.

Some states allow exemptions for compensation related to medical expenses, lost wages, or pain and suffering, while others may only protect part of the settlement. If your settlement money is non-exempt, the bankruptcy trustee can take a portion—or all—of it to repay unsecured debt.

Protecting Your Car Accident Settlement in Bankruptcy

Legal strategies to keep your settlement money

• Use exemptions: Bankruptcy exemptions may protect some or all of your personal injury settlement, depending on state laws. Some states allow full protection, while others only exempt some funds
• Choose Chapter 13 over Chapter 7: Chapter 13 allows you to keep more assets, including a settlement, by structuring a repayment plan, while Chapter 7 may require non-exempt funds to be used for debt repayment
• Keep settlement funds separate: Avoid depositing your settlement money into a regular account with other funds, as this can make it harder to claim exemptions and protect the money from creditors
• Avoid commingling funds: Keeping settlement money separate from regular finances prevents confusion and ensures you can prove which funds are protected under bankruptcy law

How to handle a car accident claim before filing for bankruptcy

• Wait to file if possible: If you expect a large settlement, delaying bankruptcy may help you retain more of your compensation, as funds received before filing may become part of the bankruptcy estate
• Use settlement money wisely: If you receive a settlement before filing, paying for essential expenses like medical bills or necessary living costs may reduce the amount of money that could be taken to pay creditors
• Disclose the claim properly: Any pending personal injury case must be reported in your bankruptcy petition, and failing to do so can lead to legal consequences or loss of funds
• Plan your bankruptcy timing: Filing at the right time can affect how much of your settlement money you get to keep, so understanding the full financial impact is essential before proceeding

Is a Personal Injury Lawyer Needed?

A personal injury lawyer is often essential when handling an accident claim alongside bankruptcy. Without legal guidance, you may risk losing part of your settlement money, missing deadlines, or failing to properly disclose your claim, which can lead to legal consequences. Since a personal injury settlement might be considered part of the estate, a lawyer can help you determine how much of your compensation is protected under exemptions and ensure that your claim is handled correctly.

Beyond bankruptcy concerns, insurance companies often try to minimize payouts, especially if they know a claimant is in financial distress. A personal injury lawyer negotiates on your behalf to secure a fair settlement that accounts for medical bills, lost wages, and pain and suffering. If the at-fault driver files, a lawyer can determine whether your claim can still be pursued, as certain debts—such as those from drunk driving or intentional harm—cannot be discharged.

Handling a bankruptcy case and a personal injury claim simultaneously is legally complex, and mistakes can be costly. A lawyer ensures you follow all laws, file the correct documents, and protect your financial recovery. Legal representation is the best way to navigate both processes without jeopardizing your compensation or legal rights.

Final Thoughts

Managing a car accident claim while dealing with bankruptcy can be complicated, especially when protecting your financials. The timing of your bankruptcy filing, the type of claim you have, and available legal exemptions all play a role in determining whether you can keep your compensation. Taking the right steps now can help safeguard your financial recovery and prevent unnecessary losses.

At YourAccident.com, we connect accident victims with experienced personal injury lawyers who understand the challenges of handling a claim alongside bankruptcy. If you want to learn more, check out our in depth articles to give you the insights you need to move forward. If you're unsure how your settlement will be affected or need help protecting your compensation, our attorneys can provide the guidance you need.