Last year, I was standing in the customer service area of the local hardware store when a large roll of tar paper propped against the counter fell and broke my ankle. Since I'm a grocery clerk, I couldn't work, and the bills stacked up fast.
I want to file for Chapter 7 bankruptcy, but I just settled my injury case with the hardware store for $75,000. Will I have to give up the settlement money if I file for bankruptcy?
It will depend on the laws of your state. Even though you don't have to give up all your assets when you file, the amount you can keep (exempt) will depend on state law. Because the injury occurred before the bankruptcy, your $75,000 settlement would be an asset of the bankruptcy estate. You must protect it with a bankruptcy exemption to prevent losing the settlement.
Most people file for Chapter 7 bankruptcy rather than Chapter 13 if it wipes out most or all of their debt. In exchange for a debt discharge, the bankruptcy trustee will sell the property you can't exempt—your nonexempt assets—and use the proceeds to distribute to your creditors.
You don't have to give up everything, however. State and federal laws (called exemption laws) allow you to keep certain property. The idea is to ensure you have enough basics to start fresh.
Everything you own must be listed on the proper schedule in the bankruptcy petition you file with the court, including funds received to settle a lawsuit.
If you don't disclose the settlement, you could suffer significant consequences, such as not receiving your discharge. You could even be charged with fraud, and, if convicted, you could face fines, jail time, or both.
Whether it is a settlement, an arbitration award, or a trial judgment, all the money you receive to compensate you for an injury is part of the property in your bankruptcy estate. You'll include money from personal injury lawsuits, such as:
It also includes money you receive from other types of cases, for instance, contract disputes, real estate lawsuits, and discrimination cases.
Each state has its own set of exemption laws. And some states allow you to use the federal bankruptcy exemptions instead of state exemptions.
Either way, if the money you received in your personal injury settlement is exempt under your state exemption laws, you can keep it in Chapter 7 bankruptcy.
Here's how it works.
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