The 2005 Bankruptcy Code Amendments really shook up Chapter 13 cases and changed the way attorneys need to deal with personal injury awards. The new definition of "projected disposal income" verses "disposable income" has put a new twist with personal injury awards. The days of confirming a plan and the personal injury award being swept under the rug and forgotten as time passed is no longer the norm in Chapter 13 cases. It is almost tragic to see attorneys trying to deal with personal injury cases today in bankruptcy cases, trying to apply the old "disposable income" rules. When this happens, it is almost certain that the personal injury award that could be and should be protected is not and the debtor must turn over part of the award to the Trustee.
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Why does this happen? If an attorney applies the old law of "disposable income," a personal injury award is often listed as "unknown" on Schedule B of a Debtor's schedules. The truth is that the amount of the award is really "unknown." It used to be common practice that if you did not know how much an award was going to be, an attorney would list it as "unknown." The reasoning behind this practice was that you would not want to misrepresent an amount of the award unless you actually knew the amount. It was understood that neither an attorney nor a debtor could actually ascertain the amount of the award until it was granted by a court or settlement was agreed upon. An attorney would disclose it and wait until an amount was agreed or granted by a court to disclose the actual amount. Generally, an award or settlement would occur years into the Chapter 13 case and often was not even considered as part of the plan payments.
However, Chapter 13 cases no longer use only "disposable income" to determine the funding of a plan. Instead, a Chapter 13 plan is determined using "projected disposable income." See 11 U.S.C. §1325(b)(2). Projected disposable income does include personal injury awards, whether granted by court order or settlement. Therefore, if an attorney applies the old way of thinking of listing the award as "unknown," and does not take an exemption, the debtor can and will have to include the award into paying his/her creditors. The award is seen as an addition to the already paid plan amount and not a way to pay off the plan earlier.
So how should an attorney deal with a personal injury award in this new "projected disposable income" world? An attorney must disclose the potential of an award for the debtor and then fully exempt as much as possible pursuant to the exemptions allow in that jurisdiction. For example, if the jurisdiction allows federal exemptions, an attorney should take 11 U.S.C. §522(d)(11)(D), which authorizes the exemption of $20,200 of proceeds for a personal injury claim, excluding pain and suffering or actual out-of-pocket losses. The attorney must take the full amount of this exemption even if the debtor does not know the actual monetary amount of the award. Therefore, if the award is $16,000.00, the full amount will be exempted even if the award occurs three years after the filing date.
There are other exemptions an attorney should take in this example, such as 11 U.S.C. §522(d)(10)(C), which allows an exemption of the debtor's right to receive a disability, illness, or unemployment benefit, with no limit on the dollar amount.
Section 522(d)(11)(B) allows an exemption for payments on account of wrongful death, to the extent needed for the support of the debtor or the debtor's family. Section 522(d)(11)(E) allows an exemption for payments on account of loss of future earnings, to the extent needed for the support of the debtor or the debtor's family. There is no reason this section should not apply to no-fault wage loss claims or personal injury awards arising from automobile accidents. Finally, the $11,200 "wild card" exemption of 11 U.S.C. §522(d)(5) can always be applied to any portion of the debtor's award.
The point is that attorneys who have a client with personal injury awards must exempt all potential claims, even if they are years out before resolution, under the new "project disposable income" rules. The real reason behind the new way of looking at income was to ensure that creditors would get a piece of personal injury awards if granted in the future. The thought is: why should a debtor get a wind fall? The answer is that a debtor can still get a wind fall but only if their attorney properly protects that award.
Attorneys must be forward-looking and protect a debtor's assets, as well as income, from an award.
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