Bankruptcy Is a Bad Idea for Personal Injury Plaintiffs

People who have suffered a serious personal injury, and families that have lost the breadwinner due to wrongful death, may be  tempted to file for protection of a Bankruptcy Court. However, we  warn clients that it is generally a very bad idea. Why is that?

Upon filing of a petition for bankruptcy, control of the personal injury action passes to the bankruptcy trustee for benefit of creditors of the injury victim. 11 U.S.C.A. § 541(a)(1).

Failure to list an injury claim as an asset in a bankruptcy may result in the injury claim being barred under the equitable doctrine of judicial estoppel. If the bankruptcy case is reopened and the petition is amended to schedule the injury claim as an asset, thus giving creditors a crack at the funds, the injured person’s attorney may be appointed by the bankruptcy court to handle the case for the trustee. See, e.g., Cox v. Hardrick, 309 Ga.App. 675, 710 S.E.2d 873 (2011); CSX Transp., Inc. v. Howell, 296 Ga. App. 583, 675 S.E.2d 306(2009); Rowan v. George H. Green Oil, Inc., 257 Ga. App. 774, 572 S.E.2d 338 (2002).

Cleaning up the mess in such situations adds a great deal of work and headaches, and some expense, to the job of the personal injury lawyer. If a bankruptcy is pending at the same time as a personal injury case, the personal injury lawyer must be hired by the bankruptcy trustee and approved by the bankruptcy court, as the personal injury recovery is an asset of the bankrupt estate.

As personal injury plaintiffs are often in financial distress due to the effects of their injuries, counsel should take time in the initial interview to explain the myriad implications of a bankruptcy filing.

Inclusion in the employment agreement of a paragraph concerning the problems with bankruptcy filings, and committing the client to give the attorney prior notice before filing bankruptcy and to reveal the personal injury case to the bankruptcy court may serve a valuable educational purpose, and at the worst it cannot hurt.

For example, an attorney employment agreement might include something like this:

Client acknowledges that a discharge of debts in bankruptcy without revealing the existence of a claim for money due to injury or damages can result in Client being barred from any recovery for such injury or damages. In the event that Client finds it necessary to file a petition for bankruptcy, Client will give Attorney ten (10) days written notice prior to filing such a petition, will provide to the bankruptcy attorney, trustee and court full and complete details regarding the existence of this claim for personal injury and the employment of Attorney in this matter, and will provide a copy of this agreement to any such court upon request.

Ken Shigley is immediate past president of the State Bar of Georgia and current chair of the board of the Institute for Continuing Legal Education in Georgia. Lead author of Georgia Law of Torts: Trial Preparation & Practice (West, 2010-12), he has an AV Preeminent rating in Martindale-Hubbell Law Directory and Bar Register of Preeminent Lawyers, double board certification in Civil Trial Advocacy and Civil Pretrial Advocacy from the National Board of Legal Specialty Certification (formerly National Board of Trial Advocacy), and is listed in Super Lawyers (Atlanta Magazine), Legal Elite (Georgia Trend) and Who’s Who in Law (Atlanta Business Chronicle). In the American Association Justice, he is a board member of the Trucking Litigation Group and secretary of the Motor Vehicle, Highway & Premises Liability Section.