Can Creditors Take My Personal Injury Settlement?
In general, a creditor may not take your personal injury settlement if the state deems that the award is for you to continue living life as usual. However, state exemption laws exist, also called bankruptcy exemption laws, allow a creditor to take part of your settlement up to the specific exemption amount depending on the type of debt.
Civil Action
A creditor who makes a claim against your personal assets or income must follow certain protocols. First, the creditor must file a lawsuit against you, prove and win its case in court. Once it wins its case, the court grants the creditor a deficiency judgment which it can use to garnish part of your wages, seek a bank levy or file a lien against your personal property.
Personal Injury Settlement
States usually protect personal injury awards from creditors, particularly if you need the money to continue living a normal life. However, it doesn't mean that a creditor will not attempt to take your personal injury settlement to pay off a defaulted loan. The creditor may obtain information regarding the size of your award in pursuing a civil action. Your case before the judge can indicate your need for the settlement money to maintain your standard of living.
State Exemptions
State exemptions, or bankruptcy exemptions, stipulate which assets are protected under the bankruptcy code. If an asset is exempt, you get to keep it if you file Chapter 7 and Chapter 13. Each state has its own set of exemptions. Seventeen states allow you to chose between the state exemption or the federal bankruptcy exemption. If you own a property with a state vehicle exemption of $5,000 and your car is worth $2,500, you may keep the vehicle because it is less than or equal to the state exemption. However, if the car is worth $15,000, the bankruptcy trustee may sell the car to pay off creditors and pay you the $5,000 state exemption.
Insight
State laws allow you to exempt a personal injury settlement award up to a certain amount to satisfy a judgment. If you find yourself in such a situation, find out what the state exemption is and tell a judge why the amount should be exempt. You may have to plead your case. However, if you owe back child support or federal taxes, the state and IRS may take you settlement to satisfy your financial obligation.
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For instance, personal injury lawyers are licensed by their state bar associations, of which they must be members. read here
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