What happens if your personal injury client files for, or has filed for, personal bankruptcy? Can you continue to represent that client? Can your client still make decisions about his or her legal claim? Does your client retain the right to proceeds from the claim? These are critical questions you will have to navigate.
Federal bankruptcy law requires individuals to disclose in their bankruptcy petition whether they have a pending or potential personal injury claim or lawsuit. If such a claim accrued before the date of the bankruptcy petition filing, it will become part of the bankruptcy estate. That means the bankruptcy trustee (who is appointed by the bankruptcy judge) will step into the shoes of the claimant and will control the personal injury claim.
Once the trustee controls the claim, the trustee has the right to assign counsel to handle the claim, to direct the litigation, and to agree to any settlement terms (any settlements are subject to approval by the bankruptcy judge). Thus, if your client files for bankruptcy while his or her personal injury claim is pending, you will have to apply to the bankruptcy court to represent the bankruptcy trustee with respect to that claim. If you do not, the case can be dismissed if the bankruptcy court is not aware of the claim or the trustee has not retained separate counsel. Some courts have held that you and your client have no standing to pursue the claim on your own. If the claim is dismissed, and the statute of limitations has passed for refiling the complaint after the bankruptcy trustee has discovered the claim (or defense counsel discovers the time bar and notifies the courts), the claim may be lost forever.
Additionally, because the personal injury claim becomes part of the bankruptcy estate, any money recovered on the claim generally goes to the estate, rather than the individual claimant, and can be used to pay the estate’s creditors. Federal and state bankruptcy exemptions may apply and allow the individual to retain some or all of the proceeds of their personal injury claim in certain circumstances. You should research these exemptions for the state in which the client resides.
In short, you should ask your client at the outset of your representation if they have filed for personal bankruptcy, and consider doing a search of the client’s name in the bankruptcy court docket to confirm the information provided to you. Even if the client has not made such a filing, they should know they must inform you if they file during your representation. The potential pitfalls of not being aware of a bankruptcy filing can be enormous; the benefits of knowing and taking action are equally significant.
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This article is for marketing purposes only, does not constitute legal advice, and should not be relied upon as legal advice.
