This article is intended to help the Personal Injury Attorney whose client has filed a Chapter 7 Bankruptcy in Florida. I hope to help you understand the impacts of the bankruptcy filing on your case. Bankruptcy debtors should discuss any questions they have with their bankruptcy attorney.
MY PI CLIENT FILED BANKRUPTCY… NOW WHAT?
A “bankruptcy estate” is created upon the filing of a bankruptcy by an individual debtor. The Chapter 7 Trustee’s job is to liquidate all unexempted value of the Debtor that existed on the date of filing for the benefit of their creditors. 11 USC 541 defines property of the estate. 541(a)(1) specifically includes any rights to bring a cause of action against another that existed on the bankruptcy filing date. If the accident date is before the date of the bankruptcy filing, the right to bring a cause of action for that accident belongs to the bankruptcy estate unless and until the Trustee formally abandons the asset.
The Chapter 7 Trustee steps into the shoes of the Debtor. The Trustee is now as much (or more) the client than the Debtor. If the Debtor has told you that they filed a bankruptcy it would be wise to figure out who the Trustee is and open the communication line. If the Debtor doesn’t tell you then the Trustee will reach out to you once they learn about the PI claim. The Trustee will ask if you want to continue being the PI attorney for the claim. If you agree they will need to start a process to get Court approval to hire you as Special Counsel for the bankruptcy estate (11 USC 327(e)).
Once hired by the estate you continue working the case, keeping the Trustee and the Debtor updated as needed. The Debtor must still participate and cooperate as a condition of their bankruptcy discharge. The Debtor might still be entitled to a portion of claim proceeds at the end, depending on several variables (settlement amount, exemptions claimed, creditor’s claims, etc).
WHAT HAPPENS ONCE INSURANCE MAKES AN OFFER THAT SHOULD BE ACCEPTED?
When settlement time comes the Trustee will ask you for a proposed Settlement Statement. The Trustee will have to motion the Court to approve the settlement. The Bankruptcy Court has a process called “Negative Notice” where a Motion is approved if no objection is filed within 21 days. Sometimes the Court will still set a hearing time if the judge has a question about the proposed settlement. Either way, once an Order approving the settlement is entered the GROSS proceeds of the settlement must be sent to the Trustee to be held in a separate account for the Estate.
WAIT, WHAT? GROSS? WHAT ABOUT MY FEES AND MY LOP’S?
Once the Order is entered approving the settlement the Trustee will give you an Application for Compensation that will be consistent with the already approved Settlement Statement. The Court will 99.999% likely approve it since they’ve just technically approved it before (11 USC 328). Once that Order is entered the Trustee can cut your check. Very often the LOP providers listed in the settlement statement will also be paid then as administrative expenses of the estate. If the Debtor had any amount they could exempt from the bankruptcy that would also be the time that they received that amount.
The Trustee will then divide the remaining funds between the creditor’s claims pro rata. If anything is left over after it will be paid as surplus to the Debtor.
THE BANKRUPTCY DISCHARGE HAS BEEN ENTERED, THAT MEANS I’M IN THE CLEAR, RIGHT?
Nope. The Discharge and the administration of a bankruptcy estate are two completely separate things. If there is ever a question please reach out to the Chapter 7 Trustee. Please do not start cutting checks without making sure the Trustee has abandoned the claim first.
HOW DO I KNOW IF MY CLIENT FILES BANKRUPTCY DURING MY CASE?
Ask the client in the beginning. Tell them they need to tell you if they do. You could set up a system to ask when settlement starts (Have you filed a bankruptcy since we started this? Are you thinking about filing bankruptcy?) and maybe again once the proceeds show up. You might learn about it from Defense Counsel, they like to look that stuff up. Otherwise, the client’s bankruptcy attorney may give you the heads up or the Trustee will reach out.
10/5/21 This article is a work in progress. I would love any additional questions that I could add to the FAQ section and answer.