Bankruptcy and Personal Injury Cases

Author: Attorney Christopher A. Meyer

Taking bankruptcy can have a significant effect on a personal injury case.  In a recent personal injury case[1], the Virginia Supreme Court discussed the disastrous results that can occur when a plaintiff’s taking bankruptcy and the pendency of a personal injury case are not properly coordinated.

In Kocher the plaintiff was injured in an car accident.  Over a year later, he filed for bankruptcy and received a discharge several months following his filing. His personal injury lawyer filed suit several months after that, complying with Virginia law[2] that requires attorneys to file suit (in most cases) within two years of the date of the injury. Failure to abide by this rule permanently bars cases from being filed.

Though the attorney’s filing occurred several months in advance of the legal deadline[3], it was not served and the issue properly joined until several years later.  Though often a non-issue, in Kocher the lawyers for the defendant argued that the plaintiff and his attorney did not have standing (the legal right to initiate a lawsuit)[4] to file suit. Therefore, the suit they had filed to stop the statute of limitations from running was a nullity[5] (of no legal force and effect) and the plaintiff’s suit should be dismissed. The Virginia Supreme Court agreed.

The Supreme Court held that when a person files bankruptcy, by federal law all of his assets become part of the bankrupt’s estate and are therefore controlled by the trustee (court appointed administrator of the bankrupt person’s affairs)[6] in the bankruptcy.  The plaintiff’s assets include personal injury cases, regardless of whether they have been filed or listed in the bankruptcy filing.

Once the plaintiff has filed for bankruptcy, the trustee has possession of his assets and neither the plaintiff or his attorney have the right to file suit on his personal injury case.  This rule meant neither the plaintiff or his lawyer in Kocher had standing to file suit, causing the permanent dismissal of the case.

There are several ways to handle this problem.  Once a case has been filed in bankruptcy the trustee can be asked to abandon the personal injury claim, which allows the plaintiff to file suit.  Better, once the personal injury claim has been listed as an asset the trustee can be asked to exempt the claim.  This exemption also frees the plaintiff to file suit on his case.  Lastly, If the personal injury claim is listed as an asset and not dealt with by the trustee, it can be presumed abandoned when the plaintiff receives a discharge, or order forgiving the bankrupt person’s remaining debts,[7] in bankruptcy.

If none of these actions are taken then the trustee keeps the case and the rights to file suit even after a discharge has been granted.  In that case, any suit filed by the plaintiff or his attorney will not be effective.

The point: any time that a person who has a personal injury action wants to declare bankruptcy there must be close cooperation between the attorney handling the case in bankruptcy and the attorney for the personal injury action.  A failure to follow the proper steps may result, as Kocher demonstrates, in the case being lost forever.

About the Author: Chris Meyer is a car accident lawyer in Mechanicsville Virginia with personal injury law firm of Allen & Allen. He has developed a reputation on the Virginia Rules of Professional Conduct and annually lectures on Virginia Legal Ethics. He also lectures regularly on recent decisions of the Virginia Supreme court.