In 2003 the United States Bankruptcy Court in Kansas ruled on this exact issue. The Court ruled in In Re: Smith (293 B.R. 786) that the settlement award was not an asset of the bankruptcy estate because the debtor did not discover the cause of action existed until after the bankruptcy case was closed. The Kansas Bankruptcy Court relied on State Law which holds that a cause of action does not exist, and therefore the statute of limitations does not begin to run, until the plaintiff discovers, or reasonably should have discovered, the causation of the injury. Since Smith did not realize the cause of her injuries until well after the bankruptcy was closed, the asset never came in to the estate and she was able to keep the settlement award.
In 2012 the Bankruptcy Court in Georgia found a very similar fact pattern, where the debtor had been injured prior to the bankruptcy but did not discover the injury until after the bankruptcy case was closed. In the case of In Re: Webb (484 B.R. 501) the court ruled that the settlement award was an asset of the bankruptcy estate because the bankruptcy court was not bound by state laws that allowed for the statute of limitations on a cause of action to begin accruing on the date of discovery. In Webb the Trustee was allowed to administer the settlement because it was not listed and exempted in the original bankruptcy filing. However, the bankruptcy Judge pointed out that the debtor may still be able to claim his personal injury exemptions and leave nothing for the Trustee. Depending on the size of the settlement and amount of personal injury exemption, the debtor in Webb may still be able to keep his entire personal injury settlement.
In the 2009 case of In Re: Wilmoth (412 B.R. 791) the Bankruptcy Court in Richmond, Virginia held that a debtor was not implicitly granted the right to amend schedules and claim exemptions simply because the Trustee reopened the case. In Wilmoth the Court found that the debtor was aware of the personal injury case prior to filing bankruptcy and simply left it off the bankruptcy schedules. The court held that a Trustee may open the case to administer assets but the debtor would have to show good cause to be allowed to amend schedules. The court went on to explain that the debtor would have to demonstrate “excusable neglect” for failure to amend before the bankruptcy case was closed. In this case the Court denied the debtors motion to amend schedules to claim his exemption in the personal injury settlement funds.
If you forget to list your personal injury case on your bankruptcy schedules, the Bankruptcy Court will, most likely, not allow you to amend your schedules after your case is closed. When your personal injury case settles, the Bankruptcy Trustee will take the award because it is an asset of the bankruptcy estate even though it was not listed and you will not be permitted to file amended schedules claiming your exemptions. If you did not discover the injury or cause of action until after your bankruptcy case is closed, you may be able to rely on In re: Smith to prevent the asset from becoming part of the bankruptcy estate. If the asset becomes part of the bankruptcy estate you may be able to rely on In re: Webb or In Re: Wilmoth to amend your schedules to claim your exemptions.
If you were in a car accident and failed to list the injury on your bankruptcy schedules it is unlikely you will be able to claim that you were unaware of your injuries and be permitted to amend your schedules after the case is closed. Typically, the undiscovered personal injury cases are related to mass tort or class action suits where the debtor took a drug or used a medical device that later turned out to be defective. In cases like this the debtor can legitimately argue that the injury was not discovered until a doctor diagnosed the injury as being related to the medical devise or drug that was taken years earlier. The requirement to list all potential assets or claims does not end with personal injury settlements; the debtor must also list any other class action suits, mass torts, civil actions, consumer protection claims, employment discrimination claims, civil action claims or any other then existing cause of action the debtor may wish to maintain after filing bankruptcy.
If you are preparing to file for bankruptcy, make certain that you list all of your assets, including any cause of action to which you may be party to in the future. Failure to list and exempt the personal injury claim could lead to the personal injury case being dismissed in State Court or could lead to the Chapter 7 Trustee taking the settlement for the benefit of your creditors. Filing bankruptcy without an attorney can easily lead to the loss of tax refunds, homes, automobiles and future personal injury claims. If you are considering filing a bankruptcy, you should consult with the experienced bankruptcy attorneys at John W. Lee, PC.
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