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What Happens if The Defendant in Your Personal Injury Case Files Bankruptcy?

Aug. 31, 2015

You were severely injured in an accident and you are making a claim against the person or corporation for your injuries. One day you open your mail and find a notice from the bankruptcy court telling you that the other party has filed for bankruptcy – how does this impact your case.

As an overview there are two general things that you have to know about bankruptcy:

  • The first is that if you are making a personal injury claim – you are classified as a potential unsecured creditor – just like a credit card company.

  • The second is that once the bankruptcy petition is file there is an automatic stay in place, which means your case cannot go forward.

How we handle the situation depends on whether the defendant is an individual or business with a liability insurance company or not.

First, let’s talk about the claim against a defendant with insurance. If the defendant is insured, we can file a motion in the bankruptcy court asking the Court to lift the stay to the extent of liability insurance. In other words, the bankruptcy estate will not be responsible or liable to you. Any recovery will be limited to the amount of available insurance. So you will only be able to get money from the insurance company and not the individual or the business, even if your damages are worth much more than the insurance proceeds.

If the defendant is a self insured – like a lot of big companies – you are going to be at the mercy of the bankruptcy proceeding. You will have to make a claim against the bankruptcy estate and you will be considered an unsecured creditor.

A dozen years ago my clients had a number of pending settlements when K-Mart filed for bankruptcy. In the end, the bankruptcy court ended giving unsecured creditors about 11 cents on the dollar – in these situations there is not much that can be done.