When a person files for chapter 7 bankruptcy, all of their existing rights to property, as of the date they file their case, is considered property of the “bankruptcy estate.” This includes not only property that they actually own at the time of filing, but also, includes their right to receive property in the future. An example of this would be money they have a right to receive as a consequence of a current or future lawsuit. If, at the time the bankruptcy case is filed, the debtor has an existing right to file a lawsuit for monetary damages, the debtor’s claim to the money is property of the bankruptcy estate, regardless of how far into the future the money is actually received (even if it’s years after the debtor files their case and gets their discharge).
For example, if a debtor is injured in a car accident a month before filing bankruptcy due to the negligence of another driver, the debtor’s right to make a claim against the other driver to receive money damages from a future personal injury lawsuit is property of the bankruptcy estate. This is because their right to make a legal claim against the other driver exists at the time they filed their bankruptcy case and it does not matter whether they have even considered filing a lawsuit or haven taken any legal action to recover money for their injuries (i.e. consulted with, or hired, a personal injury lawyer).
In a chapter 7 bankruptcy, the bankruptcy trustee legally possesses all of the debtor’s property that is deemed to be property of the estate. In most cases, much of this property is exempt, meaning legally protected from being taken to pay the debtor’s creditors. The chapter 7 trustee’s job is to determine which property is exempt, and which isn’t, and then, take and liquidate the nonexempt property, into cash form, to pay creditors. In Minnesota, debtors can choose to use the either the provisions of the Federal Bankruptcy Code or any other applicable State and Federal laws to exempt and protect their property.
The Bankruptcy Code provides that the right to receive future monetary damages from a personal injury claim is protected up to $25,150. It also provides that the debtor may keep the money already received from their personal injury case up to the same amount so long as that money is traceable to the personal injury claim. A debtor expecting to receive a payout from a personal injury lawsuit prior to filing for bankruptcy is well advised to put the money in a separate bank account and keep it separate from other funds. This is because depositing money derived from a personal injury claim into a bank account into which other money is deposited can make it very difficult to trace, or distinguish, the money from the injury claim from the other money. The ability to trace the money in the bank account to the personal injury claim becomes increasingly more difficult as time passes and as the number of subsequent withdrawals and deposits increase.
If the debtor chooses not to use the Bankruptcy Code to exempt property, their right to file a personal injury claim is likewise protected under Minnesota State law. In this case, the debtor’s right to receive future money from a current or future personal injury lawsuit is exempt up to an unlimited amount. This means the aforementioned hypothetical debtor injured by the car accident could keep a future $100,000 personal injury claim settlement. However, State law differs from the Bankruptcy Code in that the State law only exempts the debtor’s right to money from a personal injury claim to be received in the future. Once the money has been actually received by the debtor it is no longer exempt and protected. This means that money derived from a personal injury claim is not exempt if received before the date the bankruptcy case is filed, but is exempt if received after the case is filed.
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The choice of whether to exempt property via the Federal Bankruptcy Code or via other State and Federal laws is important because it determines how much property the debtor will be able to keep in their chapter 7 bankruptcy case. This can become a complicated analysis and it is advisable to first discuss these matters with an experienced bankruptcy attorney to ensure that your property (i.e. money from a personal injury claim) receives the most protection when you file your case. See us at LifeBackLaw.com!