South Carolina Lawyer
SC Lawyer, January 2007, #6.
A Bankruptcy Primer for Personal Injury Lawyers
South Carolina LawyerJanuary 2007A Bankruptcy Primer for Personal Injury LawyersBy William T. ClarkeThe intent of this article is to highlight some of the facets of bankruptcy significant to personal injury practice and to suggest that personal injury lawyers might do well to take the financial pulse of their clients at some point in their representation. Anyone who has handled personal injury cases knows that a serious personal injury situation can be financially catastrophic for clients. Since some of them may be on the edge financially anyway, a serious personal injury that puts them out of work for a number of weeks or months may be all it takes to ruin them, especially in those situations where insurance coverage is inadequate. However, there are quite a few lawyers whose areas of practice permit them not to have to wander into the bankruptcy field. Consequently, many lawyers remain oblivious to the occasional salutary effects of a well-timed bankruptcy or, for that matter, to the potential negative fallout from an untimely one.
For the non-bankruptcy lawyer, it's likely that a basic overview of a Chapter 7 bankruptcy is appropriate. To begin with, the filing of a Chapter 7 bankruptcy by a debtor creates the "bankruptcy estate." This consists of all property belonging to the debtor-real and personal, tangible and intangible-including intangible causes of action, such as causes of action for personal injury. 11 U.S.C § 541(a)(1). A trustee is appointed in every case to review the debtor's schedules and conduct an investigation to determine whether there are any assets that might be seized and liquidated in order to pay a distribution to creditors. The trustee cannot, however, sell property subject to an unavoidable lien without paying off the lien holder, or property for which there is an exemption without paying the debtor the value of the exemption. As a practical matter, therefore, a substantial percentage of cases become "no asset" cases. This is simply because the debtors' assets are protected sufficiently by the various exemptions, encumbered by valid liens or perhaps some combination of the two. Occasionally, however, there is an asset issue involving some item for which value, net of any liens, exceeds the applicable exemption, such as, for example, a pick-up truck worth $6,000 that is paid for (the South Carolina exemption for a motor vehicle is $1,200-S.C Code § 15-41-30(2)). What would otherwise be a "no asset" case becomes an "asset case" with the trustee taking the truck and selling it and, after paying the debtor his exemption, using the proceeds to pay a distribution to creditors. All of the debtor's debts are discharged, but the debtor loses the truck in the process.
On the other hand, many bankrupts elect to go into Chapter 13, often referred to as the wage earner plan, whereby their future earnings are used to pay a Chapter 13 trustee each month, and generally for five years, thereby paying at least a percentage of their debt over time. Aside from the noble purpose and satisfaction of paying at least part of one's debts, two of the major advantages to filing under Chapter 13 are that in Chapter 13 a debtor can "cure" a mortgage arrearage over time through the plan, and thus stop a foreclosure, and the fact that the Chapter 13 trustee does not liquidate assets. Thus, your client need not worry about losing his bass boat and pick-up, both of which are paid for. The downside of Chapter 13 is that your client is strapped to a payment plan for the next five years, with payments that eventually may prove to be too much. Statistics indicate that the failure rate for Chapter 13 plans is more than 50 percent. No wonder then that some bankruptcy attorneys consider Chapter 13 to be "slow death" and adhere to the precept that "any Chapter 7 is better than a Chapter 13." Moreover, while your clients may take solace in the fact that in Chapter 13 they will not lose a particular asset that is either not exempt at all or valued substantially in excess of the applicable exemption, the significance of nonexempt assets in Chapter 13 is that their value must be taken into account by the Chapter 13 trustee in determining the extent of payout under the plan, i.e., the trustee is required to perform a "liquidation analysis," as under 11 USC Section 1325(a)(4), the debtor must pay over the course of the plan at least as much as his creditors would realize if he were filing under Chapter 7. Thus, your client's pick-up and bass boat might be "safe" but they may be the albatross around his neck that eventually drowns him.
It is important to understand that the exemptions can vary from state to state, and the variances can be quite substantial, owing to the fact that when Congress passed the Bankruptcy Code in 1979, it created a set of federal exemptions, but also provided that the states could "opt out" of the federal exemptions in favor of their own state exemptions. South Carolina, like some 33 other states, has elected to opt out of the federal exemptions in favor of our own exemptions listed in S.C. Code § 15-41-30, which exempts:
(11) The debtor's right to receive or property that is traceable to;
... (B) a payment on account of...