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Bankruptcy Law Blog

Monday, December 26, 2016

Auto Accident Settlement Funds Belong to Bankruptcy Estate

 What happens to unexpected cash infusions during bankruptcy? 

Anyone who has experienced a financial crunch has wished that a money tree would suddenly pop up in his or her yard. Sometimes this can actually happen, figuratively speaking of course, and we feel like we’ve got some room to breathe. Unfortunately, if this money tree sprouts closely before or after a bankruptcy, it may be your creditors that get to harvest the bounty.

A bankruptcy court in Louisiana recently brought forth the bad news when it held that a Chapter 13 bankruptcy debtor who was injured in an automobile accident would not be entitled to any of his settlement proceeds until his creditors had received their due. The debtor, Clyde Wilson, was in an auto accident three years after the confirmation of his Chapter 13 plan. He was required to amend his schedules to disclose the potential lawsuit that resulted from the accident.

After settling his case, Wilson would receive over $74,000. Unfortunately for Wilson, he was not able to keep those funds, as they belonged to the bankruptcy estate. Under a Chapter 13 bankruptcy, debtors are required to propose a repayment plan that includes the use of future income to repay all or a portion of their debts over a period of 3 to 5 years. This rule applies to more than just automobile accident settlements. Other unexpected income that might flow to the bankruptcy estate includes:

  • Inheritances
  • Life Insurance Proceeds or Other Death Benefits
  • Lottery Winnings
  • Marital Settlements
  • Gifts
  • Bonuses

In Chapter 7 bankruptcies, the law is a little different. With Chapter 7 bankruptcy proceedings, the debtor is usually given “a fresh start” and is not required to come up with a payment plan. Debts that can be settled using the debtor’s non-exempt assets are settled and that is the end of the story. At least, that is the end of the story after a 180-day waiting period.

Let’s say you filed for a Chapter 7 bankruptcy on January 2nd.  While it’s true that you don’t have to pay your debts under your current circumstances, if you receive any type of non-exempt cash infusion, such as a legal settlement, before June 2nd, you would be required to use those new assets to repay creditors.

Inheritances bring up an interesting twist when it comes to bankruptcies. The important date that you must remember is the date that you have the right to receive that inheritance. This is not when the money is released to you, but rather, the date that the person died. So, if your long lost Uncle Fred suddenly dies on safari leaving you a half a million dollars and you think that you can file for bankruptcy to eliminate your debt while his estate spends the next year or so in probate, you will be in for a sad surprise.

Expecting a large infusion of cash either before or after filing for bankruptcy?

If you are thinking about bankruptcy and how your financial situation might be affected, talk to an experienced bankruptcy attorney. The trusted Alabama bankruptcy lawyers at Padgett and Robertson can provide you with accurate information and options to alleviate your debt burden. Call today at 251.342.0264 for a consultation.

Auto Accident Settlement Funds Belong to Bankruptcy Estate 

What happens to unexpected cash infusions during bankruptcy?

Anyone who has experienced a financial crunch has wished that a money tree would suddenly pop up in his or her yard. Sometimes this can actually happen, figuratively speaking of course, and we feel like we’ve got some room to breathe. Unfortunately, if this money tree sprouts closely before or after a bankruptcy, it may be your creditors that get to harvest the bounty.

A bankruptcy court in Louisiana recently brought forth the bad news when it held that a Chapter 13 bankruptcy debtor who was injured in an automobile accident would not be entitled to any of his settlement proceeds until his creditors had received their due. The debtor, Clyde Wilson, was in an auto accident three years after the confirmation of his Chapter 13 plan. He was required to amend his schedules to disclose the potential lawsuit that resulted from the accident.

After settling his case, Wilson would receive over $74,000. Unfortunately for Wilson, he was not able to keep those funds, as they belonged to the bankruptcy estate. Under a Chapter 13 bankruptcy, debtors are required to propose a repayment plan that includes the use of future income to repay all or a portion of their debts over a period of 3 to 5 years. This rule applies to more than just automobile accident settlements. Other unexpected income that might flow to the bankruptcy estate includes:

  • Inheritances
  • Life Insurance Proceeds or Other Death Benefits
  • Lottery Winnings
  • Marital Settlements
  • Gifts
  • Bonuses

In Chapter 7 bankruptcies, the law is a little different. With Chapter 7 bankruptcy proceedings, the debtor is usually given “a fresh start” and is not required to come up with a payment plan. Debts that can be settled using the debtor’s non-exempt assets are settled and that is the end of the story. At least, that is the end of the story after a 180-day waiting period.

Let’s say you filed for a Chapter 7 bankruptcy on January 2nd.  While it’s true that you don’t have to pay your debts under your current circumstances, if you receive any type of non-exempt cash infusion, such as a legal settlement, before June 2nd, you would be required to use those new assets to repay creditors.

Inheritances bring up an interesting twist when it comes to bankruptcies. The important date that you must remember is the date that you have the right to receive that inheritance. This is not when the money is released to you, but rather, the date that the person died. So, if your long lost Uncle Fred suddenly dies on safari leaving you a half a million dollars and you think that you can file for bankruptcy to eliminate your debt while his estate spends the next year or so in probate, you will be in for a sad surprise.

Expecting a large infusion of cash either before or after filing for bankruptcy?

If you are thinking about bankruptcy and how your financial situation might be affected, talk to an experienced bankruptcy attorney. The trusted Alabama bankruptcy lawyers at Padgett and Robertson can provide you with accurate information and options to alleviate your debt burden. Call today at 251.342.0264 for a consultation. 


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Padgett and Robertson assist clients with Bankruptcy, Personal Bankruptcy, Consumer Bankruptcy, Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and The New Bankruptcy Law in Mobile, Alabama and throughout southern Alabama. Alabama State Bar Association Regulations require the following: "No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers." 11 U.S.C. 528 of the U.S. Bankruptcy Code requires the following: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”



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