What Happens to a Personal Injury Lawsuit if the Plaintiff Files for Bankruptcy?

There is always a risk in personal injury lawsuits that a defendant may file for bankruptcy protection. If successful, a bankruptcy can effectively discharge the defendant from any obligation to pay a monetary judgment owed to the plaintiff. But what about the reverse situation? What happens if the plaintiff files for bankruptcy before the personal injury lawsuit is resolved?

Courtland Properties I, LLC v. Collins

A recent decision from the Georgia Court of Appeals, Courtland Properties I, LLC v. Collins, helps to explain how the law works in this situation. In this case, a man was injured in a slip-and-fall accident at his apartment complex. He subsequently filed a personal injury lawsuit against the apartment’s owner, alleging its negligence in maintaining the property caused the accident.

While the plaintiff’s lawsuit was pending, he filed for Chapter 7 bankruptcy protection. This prompted the defendant to file a motion for summary judgment in the personal injury case. Basically, the defense argued that once the plaintiff filed for bankruptcy, he was no longer the “real party in interest” in the case. Rather, the trustee appointed by the bankruptcy court to oversee the plaintiff’s Chapter 7 case was now the real party in interest.

To provide some additional background on what this means, when you file for Chapter 7 bankruptcy protection, a federal court appoints a trustee to take possession of your “bankruptcy estate.” This includes any property that is not expressly exempt from creditor claims under Georgia law. Now, Georgia does exempt personal injury judgments of up to $10,000, but this is often a fraction of what most such claims are actually worth.

In any event, federal law expressly assigns the right to pursue a Chapter 7 debtor’s personal injury lawsuit to the trustee. As the Court of Appeals explained in this case, since the plaintiff’s lawsuit was pending when he filed for bankruptcy, his personal injury claim “became property of the bankruptcy estate and the bankruptcy trustee became the real party in interest with standing to prosecute the claim.” In other words, it was now up to the trustee to decide how to proceed with the personal injury lawsuit, including whether to settle with the defendant or take the case to trial.

That said, the Court of Appeals said summary judgment for the defense was not appropriate at this stage of the litigation. Instead, the Court said the plaintiff should have the “reasonable opportunity” to “join” or “substitute” the bankruptcy trustee as the real party with the trial court. The trustee will also need the approval of the bankruptcy court to take certain actions with respect to the personal injury lawsuit.

As noted above, Georgia law does exempt up to $10,000 of money obtained in a personal injury lawsuit from bankruptcy. What this means is that any personal injury award beyond that amount is considered part of the bankruptcy estate. The trustee will use this money to pay off the plaintiff’s creditors in accordance with federal bankruptcy law.