What should my Personal Injury attorney do during my Bankruptcy?

05 May What should my Personal Injury attorney do during my Bankruptcy?

I had a personal injury attorney call me last week about a case he has with a client of mine who has filed for bankruptcy. The medical creditors were calling him and he didn’t know what to do. I couldn’t advise him, per se, but I told him I think there are at least three issues he would would want to be considering. First, the bankruptcy case was still open. That means that creditors cannot take actions to collect debts from the client or from people holding the client’s assets unless and until they get permission of the bankruptcy judge to do so. If a creditor who is listed in the bankruptcy schedules called the personal injury attorney about getting paid, I suggested the attorney could tell them to talk to their own attorney about the meaning of the “automatic stay” in bankruptcy (meaning creditors cannot take actions to collect debts) and about what a debtor’s “discharge” in a bankruptcy means. I suggested the attorney make a record that he had advised them to contact their attorney about it and not contact him (or contact the debtor). If they continued to contact anyone trying to get paid, the creditors may be in violation of a federal court order.

Second, I suggested the personal injury attorney consider whether he could even pursue settlement of the case while the bankruptcy was open. The Trustee in this case had already issued a “no asset” report, de facto “abandoning” his right to step into the debtor’s shoes to take over the prosecution of the case. However, the abandonment was only de facto, the case is still open, and who knows what will happen. I suggested the attorney consider whether there is a harm to the debtor if settlement were delayed for another month or two.

Third, if the attorney were to receive a recovery — while the money would initially go into the attorney’s trust account, then what? When I hold trust monies for a debtor, I do not release the monies until after the bankruptcy case is actually closed. I do this because there is always a chance that a creditor or other interested party might file something in the bankruptcy questioning who has rights to that money. If I knowingly released that money and the bankruptcy court found that it should have been released to somebody else, I might have to make up that payment personally.

The attorney said he was receiving calls from the creditors. I suggested that, in addition to referring them back to their attorneys, the personal injury attorney could simply state to them that the debtor’s monies, if any, were being held in trust until the conclusion of her bankruptcy case, and that at that time he would determine what if any payments were appropriately made out of those monies. Unsecured creditors listed in the bankruptcy schedules would have those debts “discharged” and would not be able to collect those monies from the debtor. However, I don’t know if there are other legal theories such creditors might use to claim payment, e.g., subrogation, or whether the attorney might have taken any actions that possibly made him also liable for some of the debts (e.g., by promising payment to the medical care providers out of a settlement recovery). The personal injury attorney might need to research this.

I was a little sorry that I might have raised more questions than I answered, but, to me, this is a good example of how bankruptcy is related to many things in life — it’s not simple, and it’s important to know what you are doing.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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