The Personal Injury Case and the Automatic Stay

One of the trickiest snares that can spring up in the middle of a personal injury case is a bankruptcy stay. With a bankruptcy filing, all collection activity is stopped and litigation grinds to a halt. If the filer is the plaintiff, the ownership and control of the plaintiff’s action is transferred in an instant from an empathetic debtor to a cold bankruptcy estate.1 If the filer is the defendant, then he may have just stolen the plaintiff’s bacon.

The automatic stay is an injunction that prevents creditors from seizing property of the estate or taking actions to seize such property.2  The automatic stay generally goes into effect upon the filing of a bankruptcy petition.3  The primary goals of the stay are to allow the equitable administration of available assets4 among creditors by preventing creditors from unfairly corralling assets for themselves to the detriment of similarly-situated creditors, and to provide the debtor with breathing room from collection activities during the administration of the estate.

All the assets of the bankruptcy estate are protected against creditor actions.  Most creditors cannot proceed with service, discovery, litigation, trial, enforcement of judgments, or perfection of liens against a debtor who has filed bankruptcy unless they receive court permission.5 Action taken against a debtor in violation of the stay is usually voidable.

Representing a Debtor with a Personal Injury Claim

Personal injury actions brought by the debtor are not stayed in bankruptcy. Counterclaims against the debtor are stayed. If your client holds a personal injury claim, it may still be litigated.  Upon the bankruptcy filing, the claim is included as part of the bankruptcy estate.  The continued representation of the debtor must be approved by the bankruptcy court if the litigation is ongoing during the bankruptcy.

In Chapter 7 filings, a trustee will be appointed. The trustee becomes the party in interest, with the power to pursue the litigation and negotiate settlement subject to approval of the bankruptcy court. An injured debtor has standing to object to any settlement, to claim settlement proceeds exempt as allowed by state law6, and to seek abandonment of the personal injury suit back to the debtor.7

As counsel for a bankrupt debtor plaintiff, you will want to communicate with the debtor and the trustee to determine if the estate would like to pursue the claim. Often the bankruptcy trustee will seek to hire the same personal injury counsel that filed the case.

If the injury occurred prior to filing, the debtor must list the asset.  If the personal injury claim is not listed in the bankruptcy schedules the debtor may lose standing to sue or may be judicially estopped from doing so.

Representing a Claimant with a Personal Injury Claim Against a Debtor

To preserve your client’s right to receive a payment from the estate, be sure to file a proof of claim, together with supporting documentation.  If a complaint regarding the personal injury claim is already on file, submit the summons and complaint as the supporting documentation. If the claim has not yet been brought, submit a supporting declaration laying out the basis of the personal injury claim.

Any attempt to collect from the debtor will be subject to the automatic stay.  As soon as a claimant or their attorney is on notice, formal or informal, that the defendant has filed for bankruptcy, the automatic stay operates as an injunction and allows the imposition of sanctions for attempting to collect from the debtor.  Any actions taken in a case already on file will violate the automatic stay, including service of the summons and complaint, initiating and commencing discovery or going to trial.

There are ways to preserve a personal injury claimant’s rights to receive distributions from a debtor’s bankruptcy estate and to proceed against the debtor.  The stay can be lifted to allow liquidation of the personal injury claim, either through mediation or in state court.8 A claimant can also move the court to modify the automatic stay to proceed against the debtor’s insurance company while the bankruptcy case is still pending.9  If a debtor has sufficient third-party commercial coverage with no deductible (or a deductible that has already been met) and if the insurance carrier is responsible for all defense costs with no premium adjustment, it is possible that a bankruptcy court would lift the automatic stay as the main purposes of the stay, as discussed above, would not be affected.

Depending on the chapter under which a debtor filed for bankruptcy, a claimant may be able to pursue claims against non-filing co-debtors without violating the automatic stay, and without requesting relief from stay. A Chapter 12 or 13 debtor’s non-filing, individual co-debtors enjoy the benefits of the co-debtor stay that shields them from collection on consumer debts.10 However, there is no co-debtor stay in Chapter 7 or 11 bankruptcy cases. So, if there are two potential defendants, and only one files for Chapter 7 bankruptcy, a claim may be pursued against the non-filing co-debtor.

Finally, if your client has a personal injury claim against a Chapter 7 debtor that arises from “the debtor’s operation of a motor vehicle, vessel or aircraft if such operation was unlawful because the debtor was intoxicated from the use of alcohol, drugs or other substances,” the claim and consequent debt will not be discharged.  This exception to discharge is self-executing and the debtor will remain responsible for your client’s injuries without any action on your client’s part to establish non-dischargeability.11 In such circumstances the automatic stay is imposed, but it only means delay, not loss of an injured party’s recovery.

In contrast, intentional torts causing personal injury or death, are not dischargeable, but require an injured claimant to open an adversary proceeding in the bankruptcy case within a strict timeline to preserve the cause of action.12 The automatic stay still applies for personal injury cases based on intentional torts.  Thus, the claimant cannot just wait out the bankruptcy, but must become an active participant to keep their bacon.

The Bright Side

Bankruptcy’s automatic stay can relocate the already complicated landscape of litigation into a minefield of extremely short timelines and exaggerated consequences. If there’s no money to be had, it can dramatically shorten the lifespan of a personal injury claim by revealing the ending before the game is played in earnest. But if there is a prize, the claimant that survives the automatic stay and the discharge may find himself in an unobstructed playing field in the aftermath of the bankruptcy with all of the treasure clearly marked and ready for collection.

[1] A bankruptcy estate is formed upon filing which includes essentially all of the assets of the debtor. 11 U.S.C. § 541
[2] 11 U.S.C. § 362
[3]I say generally because the stay is shortened or not invoked in certain instances of multiple filings with regards to the debtor. But the bankruptcy estate is protected by the stay as well, so in some cases of multiple filings where the Debtor does not invoke a stay, the estate will still be protected.
[4] Whether assets can be distributed from the bankruptcy estate is generally determined by comparing the liquidation value of the asset to the exemptions that the debtor are allowed.
[5]Most of the exceptions deal with family and criminal matters.
[6] 11 U.S.C. § 522
[7]11 U.S.C. § 554
[8]Personal injury and wrongful death claims cannot be tried in bankruptcy court. 28 USC § 157(b)(5)
[9] 11 U.S.C. §362(d)
[10] 11 U.S.C. §1301. However, even if the codebtor stay doesn’t apply, beware of issues in collecting against community property subject to the estate during pendency of the bankruptcy and subject to the community discharge following it.
[11] 11 U.S.C. 523(a)(9)
[12]11 U.S.C. 523(a)(9) and (c)(1)