PERSONAL INJURY LAWSUITS: JUST ANOTHER UNSECURED DEBT (MOST OF THE TIME)
Personal injury complaints or judgments filed in Michigan State courts are generally dischargeable in Chapter 7 or Chapter 13 bankruptcies.
Although many TV commercials aired by many personal injury lawyers would have you believe that there may be something sacred about such legal actions, they are merely prayers for a money judgment at the end of the day.
Money judgments are dischargeable in bankruptcy unless they fall into one of a very few categories of debts that the U.S. Bankruptcy Code (the Federal law governing bankruptcy) defines as “non-dischargeable,” such as a child support award arising from a divorce proceeding.
Unless a personal injury judgment falls within one of these categories of non-dischargeability, it is entirely dischargeable in Chapter 7 or Chapter 13 bankruptcy—and at a low priority.
PERSONAL INJURY JUDGMENTS AND DEBT PRIORITY IN BANKRUPTCY
What does “low priority” mean in a Chapter 7 or Chapter 13 bankruptcy?
The Bankruptcy Code divides debts into “priority” levels according to the nature of the debt. The priority levels govern the order in which debts are to be paid when funds are distributed by a Chapter 7 Trustee after asset liquidation or transfer avoidance, or in a Chapter 13 bankruptcy payment plan.
At the top of the priority list are the “administrative” costs of the bankruptcy case: the Trustee’s own fees and the debtor’s own attorney’s fees.
In a Chapter 7 bankruptcy, the debtor’s attorney has already been paid (usually) by the debtor, and these are never actually paid out. The Chapter 7 Trustee gets a small flat fee paid from the Court’s bankruptcy filing-fee, and then a percentage of any funds recovered from the debtor’s assets or transfers (if any).
In a Chapter 13 bankruptcy, these fees are paid through the Chapter 13 payment plan from the debtor’s monthly Chapter 13 plan payments in advance of any other creditor’s, although some plans do allow for certain secured debts to be paid in advance of attorney’s fees.
The next priority level classification is secured debts, such as a home mortgage or car loan.
In a Chapter 7 bankruptcy, if the Chapter 7 Trustee were to liquidate (sell) a home with a mortgage encumbering its title, the Trustee would, first and foremost, utilize whatever of the sale proceeds are necessary to pay off the mortgage.
In a Chapter 13 bankruptcy, many secured debts, if they are not in arrears when the Chapter 13 bankruptcy is filed, continue to be paid by the debtor directly to the secured creditor. If they are paid through the Chapter 13 payment plan, the Chapter 13 Trustee will make that mortgage or car payment, or amortized secured debt arrearage amount, next, after the administrative expenses are deducted from each monthly plan payment.
Lease payments and executory contract payments, if not being paid directly by the debtor outside of the payment plan, are the next to be paid in a Chapter 13 payment plan.
In a Chapter 7 bankruptcy, whether the debtor or Chapter 7 Trustee makes a lease or executory contract payment after the case is filed is a more complicated question outside the scope of this blog post.
If a Chapter 7 Trustee were distributing funds to creditors after an asset liquidation, this remains the next payment priority level for the Trustee.
Next are the so-called “priority” debts. These are unsecured debts that the Bankruptcy Code has determined are to be paid in full before any amount is paid to the last priority level debts: non-priority unsecured debts.
Examples of priority debts include child support awards, recent tax debt, wages owed to former employees, and a few very specific others.
Last to be paid by either a Chapter 7 or Chapter 13 Trustee are the non-priority unsecured debts. Credit card debt, medical debt, car lease or rental lease balances owed, and more all lie within this strata of debt.
They are discharged entirely in a Chapter 7 and paid only what is left over after the higher priority debts are paid in a Chapter 13 bankruptcy.
Personal injury judgments also lie within this strata.
In other words, there is nothing special about a personal injury judgment in bankruptcy. The Federal bankruptcy process entirely supersedes the Michigan state court-based money judgment plea—or award.
PERSONAL INJURY JUDGMENTS: WHEN THEY MIGHT BE NON-DISCHARGEABLE IN BANKRUPTCY
The Bankruptcy Code does specify certain situations in which an unsecured debt that is otherwise dischargeable will not be discharged in a Chapter 7 or Chapter 13 process.
One example is a debt incurred in a fraudulent manner.
A debt incurred for death or personal injury due to the debtor’s operation of a motor vehicle, vessel or aircraft if such operation was unlawful due to the driver’s intoxication from using alcohol, drugs, or other such substance.
In other words, a personal injury judgment or claim arising from drunk or drugged driving will not be dischargeable in bankruptcy.
Additionally, a debt incurred for willful and malicious injury to another “entity” or to the property of another “entity.”
The definition of “entity” in the Bankruptcy Code includes people.
Thus, if, in a fit of road rage, willfully drive your car into a queue of people lining up for a movie, bankruptcy will not save you from the (rightful) bevy of lawsuits that will follow.
PERSONAL INJURY JUDGMENTS & MICHIGAN BANKRUPTCY: THE BOTTOM LINE
The bottom line is that, if you are considering filing for bankruptcy and are or have been the subject of a personal injury lawsuit, it pays to retain a bankruptcy attorney that understands not only Federal bankruptcy law but also Michigan state law.
It is entirely possible that you may view your automobile-related injury as accidental while the injured party views your action as willful. That means litigation over the claim in your bankruptcy case. In any bankruptcy litigation, it pays to have an experienced bankruptcy attorney fighting for you.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13.