Virginia’s Personal Injury and Wrongful Death Exemption Statute
In Virginia, all proceeds recovered in a personal injury or wrongful death action are exempt from creditor process. This means that creditors may not claim an interest in, or attempt to collect from, proceeds derived from a personal injury or wrongful death claim. The only limited exceptions involve statutory lienholders, including health care providers who provided treatment related to the personal injury or wrongful death claim, and holders of voluntary assignments of personal injury or wrongful death proceeds.
Virginia is one of 25 states that allow some form of exemption for personal injury or wrongful death actions. However, unlike the personal injury or wrongful death exemption statutes in other states which contain a wide range of limitations, Virginia’s statute contains no language limiting the amount of the exemption or otherwise restricting its application.
While proceeds from personal injury cases have long been treated as exempt under Virginia common law, it was not until 1990 that a statute was enacted, specifically exempting personal injury actions from creditor process. In the Report of the Joint Subcommittee Studying Virginia’s Exemption Statutes, the joint subcommittee of members of the Virginia Senate and House of Delegates recognized that the purpose of personal injury awards “is to return the injured party to his pre-injury status” and that it would be unjust for a creditor to “have a right to the personal injury award compensating a debtor for the loss of his hand even where the creditor had no right to levy on the hand.”  Due to the clear and recognized importance of protecting injured Virginians, Virginia’s personal injury exemption statute was enacted.
Identifying Exempt Funds
In order to maintain the exempt status of proceeds from a personal injury or wrongful death claim, it is important that the proceeds be easily traceable and identifiable. For example, if the funds from a personal injury settlement or award are deposited into a separate account and no additional money is added to the balance, the recovery is openly apparent and readily identifiable. In contrast, if the exempt funds are placed into an existing account with other non-exempt funds (or subsequent deposits of non-exempt funds are made), this commingling makes it more difficult to identify the exempt amount. It is possible to transfer the exempt status of the proceeds from a personal injury or wrongful death claim to other property, e.g. by purchasing securities, certificates of deposit, or real or personal property. However, it is critically important that the exchange be clear and that the funds used for the transaction be easily identifiable as the exempt proceeds from a personal injury or wrongful death claim.
At a recent hearing in a United States Bankruptcy Court, an attorney representing a bankruptcy trustee argued that it was unfair for creditors not to be paid from the “windfall” the debtor received from their personal injury case. However, such argument ignored the importance that Virginia has placed on protecting proceeds derived from personal injury claims and wholly mischaracterizes their purpose. A “windfall” by definition is something unexpected, unearned; something blown down by the wind. Fair compensation for medical expenses, pain and suffering, lost wages, mental anguish, and other damages associated with injuries suffered as a result of the negligence of another simply returns the injured party to their pre-injury status. This is not a windfall, and as such, personal injury or wrongful death compensation is protected and exempt from creditor process under Virginia law.