You must list your personal injury case as a potential asset for the bankruptcy trustee.
In a Chapter 7, the trustee can collect 100% of what a debtor gets from their personal injury settlement. This applies to any dates of accident that occurred prior to filing the bankruptcy petition where the statute of limitations has not expired.
If you have already hired a lawyer to represent you in your personal injury case, you would want to ask them how much you might expect to receive from the personal injury case and how long will it take for it to settle or go to trial. You might decide to either wait until your personal injury case settles and use it for reasonable expenses before filing your bankruptcy case so the trustee cannot take it.
Alternatively, you might decide to not wait and file your bankruptcy case and forgo your settlement proceeds. It works a little differently in a Chapter 13. The trustee in a Chapter 13 case is entitled to at least 50% of your settlement proceeds whether your accident happened before you filed your case or while your case is pending.
Usually, the Chapter 13 trustees will agree to let the debtor keep 50% of the net proceeds of the case, where the Chapter 7 trustee’s will take 100% of the proceeds. When you consult with your bankruptcy attorney definitely let them know about your personal injury case. You wouldn’t want to file the case and then unexpectedly have the trustee take your money. Also, communicating with your personal injury attorney is also critical.
Let’s say you file your bankruptcy case in August 2023, the trustee can keep you case open until April 2024 to potentially intercept your tax refund (if you do not have exemptions that can cover it).
The trustee cannot take “earned income credit” which is a tax credit given to people who meet certain criteria for their dependents. There is also a formula for how much the trustee is allowed to keep which depends on the date your case gets filed. If you file July 1st then the trustee would only be entitled to 50% of your refund less EIC. For this reason, the trustee will usually only keep cases open to get tax refunds if its later in the year vs. in January when they would barely be recovering anything.
If you have enough exemptions left, we can also exempt your tax refund for the following year. Sometimes we suggest getting your property or car appraised, since it might allow you some extra money to put towards your exemption for the tax refund.
If you are in a Chapter 13, it is required to supply your tax return each year to the trustee and turn over your tax refund. However, if you do need your tax refund to pay for a necessary item such as a medical procedure, tires, house repairs, etc. we can ask the trustee for permission to retain your refund. As long as, you provide supporting documentation, the trustee will normally allow you to keep your tax refund.
When you file your case both a bankruptcy trustee and a judge are assigned to your case. Their roles are very different. The person with whom you’ll have your 341 hearing is actually the bankruptcy trustee not the judge.
The trustee is usually either an attorney or a certified public accountant that reviews your case and administers any assets to your creditors. For example if you are over the exemption amount by $1,500, you would pay that $1,500 to the Chapter 7 trustee and out of that $1,500 the trustee would collect a fee and they would distribute a pro rata share to any creditors who file claims in your case.
The trustee can also collect any insider payments in the past year (any money that you have repaid to friends or family members) or any gifts over $600 to any one person in the last two years. Its very important for your attorney to thoroughly review all of your bank statements and information to make sure there are no unforeseen issues on what you might have to pay the trustee.
That is also why it’s very critical to tell your attorney 100% of information so you can get proper advice on whether it’s in your best interest to file you case or whether it might be beneficial to wait to file your case. The trustee is objective is to find money to pay your creditors.
Although, creditors may also hire their own attorney to represent their interests. The judge is there to make rulings if there is a dispute between you and the trustee in terms of value of property or any other issue that may arise. In most cases there are no assets to distribute, but the trustee files the appropriate paperwork and the judge orders the discharge of your case.