When Bankruptcy Impacts Your Rochester Personal Injury Case  

You never expect your life to change in an instant, but accidents have a way of turning everything upside down. Pain, confusion, medical bills stacking up—it’s overwhelming.  

But what if the driver who hit you files for bankruptcy? Or worse, what if you’re struggling financially and need to file yourself? 

Could that wipe out your settlement? The Rochester personal injury lawyers at Horn Wright, LLP, see this happen all the time, and knowing how bankruptcy affects your claim can make all the difference. Let’s break it all down.  

Will the At-Fault Party Use Bankruptcy to Escape Justice?  

After an accident, the last thing you want to hear is that the person who hurt you is trying to dodge financial responsibility. Unfortunately, bankruptcy can complicate things—but it doesn’t always mean they walk away scot-free.  

How Liability Is Handled in Bankruptcy Cases 

When someone files for bankruptcy, the court issues an automatic stay—a legal freeze that stops creditors and lawsuits in their tracks. But here’s the key: insurance still applies. If the at-fault driver had liability insurance, you can still file a claim against their policy, even if they declared bankruptcy. Their insurance company is still on the hook.  
 
But what if they didn’t have insurance? If they file for Chapter 7 bankruptcy, your claim could be discharged—meaning you might never see a dime. However, there are exceptions:  

• If the injury was caused by drunk driving, bankruptcy won’t erase their responsibility.  
• If they hurt you intentionally, that debt likely won’t be discharged either.  

If you’re dealing with a bankrupt defendant, working with a trusted Rochester law firm that understands bankruptcy laws is critical. You don’t want to leave money on the table.  

Could Filing for Bankruptcy Wipe Out Your Injury Settlement?  

What if you are the one facing financial trouble? It happens more often than you’d think.  

Between medical bills, lost wages, and daily expenses piling up, bankruptcy can start to look like your only option.  

But could filing wipe out the compensation you fought so hard to get? That depends.  

Chapter 7 vs. Chapter 13: The Fate of Your Settlement Hangs in the Balance  

The type of bankruptcy you file will determine what happens to your personal injury payout: 

• Chapter 7 Bankruptcy: This is a liquidation bankruptcy. The court can seize certain assets to pay off your debts—including injury settlements that aren’t protected by exemptions. If your settlement isn’t shielded, you could lose a large portion of it. 
• Chapter 13 Bankruptcy: This is a repayment plan where you keep your assets but must commit to a structured payment schedule over 3–5 years. Your settlement might be considered income, which could affect how much you have to pay your creditors. However, it won’t be taken outright like in Chapter 7.

The Lifeline That Could Save Your Settlement – Exemptions  

New York has exemptions that can protect your injury settlement from being swallowed up in bankruptcy. Here’s what you need to know:  

• Federal Exemptions: You can exempt up to $27,900 of a personal injury settlement, but this excludes pain and suffering or lost wages. If most of your settlement is for medical expenses, you could protect it.  
• New York State Exemptions: The state lets you exempt $8,550 of your settlement, and possibly more depending on the specifics of your case.  

Want to shield more of your settlement? You may be able to use a wildcard exemption (if you’re not using a homestead exemption) to protect even more money.  

The rules can be complicated, but an injury claim consultation with an attorney can help you structure your settlement wisely. 

The Crushing Power of a Bankruptcy Stay – And Your Best Shot at Fighting Back  

Bankruptcy isn’t just frustrating—it can feel like a legal roadblock designed to shut you down. A court-ordered automatic stay kicks in the moment a bankruptcy is filed. That means:  

• Your lawsuit could be paused indefinitely.  
• If you’ve already won your case, you might not be able to collect right away 
• Creditors, including medical providers, must stop collection efforts immediately.

How Automatic Stays Shut Down Personal Injury Claims  

The court puts up a stop sign. But that doesn’t mean your case is over. You can ask the court to lift the automatic stay if:  

• You’re only pursuing the at-fault party’s insurance money, not their personal assets 
• Your claim falls under an exception, like a drunk driving accident.  
• You can prove the stay is causing you extreme financial hardship. 
• It’s not a guarantee, but courts do grant exceptions. The key is acting fast and making a solid argument.  

Don’t Let Bankruptcy Steal Your Injury Payout – Here’s How to Protect It 

You fought hard for your settlement. You shouldn’t have to watch it slip through your fingers because of bankruptcy. Whether it’s your own financial struggles or the defendant’s, there are ways to protect what’s yours.

Managing Future Debt with Structured Payments  

One smart way to protect your money from future financial troubles is through a structured settlement. Instead of getting one big lump sum, you receive payments over time—making it harder for creditors (or even yourself) to burn through the money too fast.  
 
Structured settlements can:  

• Help cover long-term medical costs so you don’t run out of money too soon.  
• Reduce tax liabilities, since structured payments often don’t get taxed the same way as lump sums.  
• Prevent reckless spending, giving you financial stability over time.  
• If bankruptcy is a concern, structured payments may offer more protection than a lump sum payout. It’s worth considering. 

Will Taxes Eat Up Your Settlement? Here’s What You Need to Know  

Not all of your personal injury payout is tax-free. The IRS doesn’t tax compensation for physical injuries and medical expenses, but you could be taxed on:  

• Punitive damages – If the court awarded extra money to punish the defendant, you’ll likely owe taxes on it.  
• Lost wages – Since this replaces taxable income, the IRS will take its cut.  
• Interest on your settlement – If you win your case but don’t get paid immediately, the interest accrued could be taxable.  

Pro tip: If you’re worried about tax liability, consider working with a tax professional or attorney to structure your settlement wisely.  
 
Bankruptcy and personal injury claims are a messy mix, but they don’t have to destroy your financial future. If you’re dealing with an accident case involving bankruptcy—whether it’s yours or the at-fault party’s—it’s crucial to understand your rights.  

A car crash legal services expert or skilled Rochester personal injury attorney can help you protect your settlement and fight for every dollar you deserve. Whether you’re seeking slip and fall compensation or justice for a serious accident, don’t let bankruptcy stand in your way.  

If you want the best representation, one of the best law firms in America, Horn Wright, LLP, is here to fight for your rights. 

Call our office today to get started with your free consultation.