The debtor is currently entitled to a personal bodily injury exemption of $8,275 under New York and $22,975 under the federal law. Under federal law the exemption could potentially be enhanced by using a portion of a wildcard exemption of up to $12,725, if available. These amounts are adjusted upward for inflation every three years with the next adjustment due in early 2006. A debtor might also be entitled to a portion of the recovery allocated to loss of future earnings. A full review of all exemptions is beyond the scope of this article.
The debtor must immediately notify his or her personal injury counsel of the bankruptcy filing and that the cause of action is subject to the trustee’s administration. All funds recovered will be paid to the trustee. The debtor is only entitled to be paid that which is allowed under the law. The personal injury attorney will generally be retained by the bankruptcy trustee pursuant to court order to prosecute the action, which the trustee owns and controls (a blog post focused on this very topic is being written, so keep an eye out). This can make for an awkward situation because the debtor will no longer be the “client” of the personal injury attorney. The debtor will nevertheless be required to cooperate in the prosecution of the case as a condition to receiving their bankruptcy discharge. To ensure the continued cooperation of the debtor, the trustee will generally retain the same personal injury counsel as the debtor and not object to a debtor’s exemption even when the facts might not fully support the exemption asserted.
The pendency of a personal injury action may require the bankruptcy case to remain open for years until the action is concluded. The debtor’s discharge however will be often granted in the ordinary course within months of the bankruptcy filing and is not tied to the date the bankruptcy case is closed. The debtor’s receipt of a bankruptcy discharge should not be misunderstood as a closure of the bankruptcy case and the ability to once again take control of the personal injury action. The action remains property of the trustee and the estate until the entire bankruptcy case is closed. There are serious consequences to a debtor improperly taking property of the estate including denial/revocation of discharge and federal criminal prosecution.