What Effect Will My Bankruptcy Have on a Pending Settlement?

For many Americans, a pending settlement from a lawsuit, inheritance, or insurance claim is a door to a brighter, more prosperous future. A lump sum settlement brings to mind everything from luxury vacations to nicer homes, cars, and wardrobes. There’s only one problem: those pesky creditors.


Especially if you suffered an injury that took you off work, your bills and expenses are approaching Critical Mass. Add medical bills for the tests, treatments, therapy and medication. The proposed settlement starts looking smaller all the time.


But what if you declare bankruptcy before the settlement is finalized? Get rid of all the debts and make a fresh start by keeping your settlement all to yourself.


Bankruptcy laws require you to disclose all pending settlements, inheritances, and insurance claims. They become part of the bankruptcy estate, and the bankruptcy trustee will distribute any money he recovers to your creditors. However, your personal circumstances and the nature of the settlement will affect the judge’s decision. If the trustee determines that the claim might not be worth the time, he might abandon the interest of the estate in your claim. That means you can continue to pursue the claim and do not have to turn over any proceeds to the trustee. Some claims, such as workers’ compensation claims might be exempt from the reach of your creditors and trustee as long as the claim is not settled. Personal injury claims are more difficult. The law is not clear about whether the personal injury claim is part of the bankruptcy estate or not. A trustee might ask for the whole settlement or part of it.


Therefore, it is important to hire a knowledgeable, experienced bankruptcy attorney to review the facts of your case before filing with the court. For example, if your late-model vehicle was wrecked, the primary purpose of your insurance settlement may be to replace that vehicle so you have dependable transportation to get back and forth to work. Your bankruptcy attorney might advise you to replace the vehicle before filing of the bankruptcy case. After filing the claim might become part of the bankruptcy estate. However, if the settlement is compensation for an injury, medical providers may have legal claim for payment from the settlement.


Under no circumstances should you try to hide your pending settlement from the Bankruptcy Court. You could be charged with fraud and suffer severe penalties.


Should you delay filing your claim and declare bankruptcy first? Again, you should consult an experienced Bankruptcy attorney. Even after a bankruptcy has been finalized, creditors can petition the Court to reopen the case if fraud is suspected.


If you receive an inheritance, the trustee and your bankruptcy attorney needs to know about it. An inheritance within 180 days after filing your bankruptcy case becomes part of the bankruptcy estate. That is true even when your case is already discharged and closed. You have an ongoing duty to report an inheritance to the trustee. If the inheritance is not exempt, the trustee will reopen your case and distribute any funds to your creditors. Inform your bankruptcy attorney about a settlement as soon as you know about it. Your bankruptcy attorney will then forward the information to your case trustee.


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