Can I Keep Money I Receive From a Lawsuit When I File Bankruptcy?

Do You Get To Keep Money From a Lawsuit in Bankruptcy?

If you have the right to file a lawsuit against someone, that right — sometimes called a “cause of action” — counts as an asset in bankruptcy. That’s true even if you haven’t filed the case yet, and even if you’re not sure you’ll win or get any money. Because it’s considered an asset, you need to list it in your bankruptcy forms, just like you would a bank account or a car.

This article will explain why it’s so important to disclose this kind of asset and work with the bankruptcy trustee. It’ll also go over whether you can keep money from your lawsuit, and how much you may be able to protect.

💡 Think of it this way: If there's even a chance you could get money from a lawsuit, the bankruptcy court sees that as something of value, and it has to be included in your case.

Where Do You List Lawsuits on Your Bankruptcy Forms?

If you're involved in a lawsuit, but haven't yet received any funds, you'll generally need to list the lawsuit in at least two places on your bankruptcy forms:

• In response to Question 33 on your Schedule A/B. If a lawsuit hasn’t yet been filed, you’ll list the potential cause of action instead.

• In response to Question 9 on your Statement of Financial Affairs.

If you’ve already received money from your lawsuit — whether from a settlement or winning at trial — the situation works a little differently. In this case, the money itself is the asset. What happens to that money in bankruptcy depends on a few things.

One is how you received it. For example, cash in your bank account may be treated differently than payments you get through an annuity. Another key factor is whether you can use any bankruptcy exemptions to protect some or all of the money.

⚠️ Upsolve is not a good fit for individuals with pending personal injury or other lawsuits that may result in winnings. If you're involved in such a suit, Upsolve can connect you with a local bankruptcy attorney for a free consultation.

Can You Protect Lawsuit Money in Bankruptcy?

Just because you list a current or possible lawsuit in your bankruptcy forms doesn’t mean you’ll lose the money from it. Lawsuits are considered assets in bankruptcy — even if you haven’t received any money yet — but bankruptcy law includes exemptions that can help you protect some or even all of that money.

If you’re using the federal bankruptcy exemptions, you may be able to protect up to $31,575 in money received for a personal bodily injury. (This doesn’t include pain and suffering or punitive damages.) Federal exemptions also protect other types of payments, including:

• Compensation for lost future income — if it’s needed to support you

• Money received after the wrongful death of a close family member — if it's needed for your support

• Payments you’re entitled to as a crime victim under a reparation law

If you live in a state that doesn’t allow federal exemptions — known as an "opt-out" state — you'll need to check your state’s rules instead. Some states have specific exemptions for personal injury awards or lawsuit money.

Others offer a wildcard exemption, which you can apply to any kind of property. Unfortunately, a few states don’t offer much protection at all for lawsuit proceeds.

What Can Happen If You Don’t Disclose a Lawsuit?

If you have a lawsuit or the right to file one, it’s really important to list it in your bankruptcy forms. Not doing so can cause serious problems. The bankruptcy court could even dismiss your case, which means your debts wouldn’t be wiped out.

Leaving the lawsuit off your forms can also hurt your chances in the lawsuit itself. If you tell the bankruptcy court you don’t have a claim, the other side in your lawsuit might use that against you. They could argue that you shouldn’t be allowed to keep suing since you said in bankruptcy that no claim existed. Basically, you can’t tell one court one thing and a different court something else. It can come back to hurt you in both cases.

How Lawsuits Work in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, your creditors are only entitled to assets you owned or had a right to when you filed your case. In most situations, you get to keep anything you receive after filing — including property, money, or lawsuit payouts. That’s part of how Chapter 7 helps people get a fresh start.

So, if you're in an accident after filing your Chapter 7 case, you can usually keep all of the money from any lawsuit or settlement that results. But here’s where it gets tricky: Just waiting to file your lawsuit doesn’t keep it out of your bankruptcy. What matters is when the right to sue began — like the date of the accident — not when you officially filed the lawsuit.

Things can get even more complicated if your lawsuit isn’t related to something obvious like an accident. It’s easy to overlook that you even have a legal claim in these situations. If you don’t realize you have a claim and leave it off your bankruptcy forms, the court might still decide you should’ve listed it. Whether or not the court sees it as part of your bankruptcy estate often depends on your state’s laws and the details of your case.

If the court believes your mistake was honest, it usually won’t dismiss your case or penalize you. But it may still count the lawsuit as part of your bankruptcy estate, which means the trustee could step in and manage it.

How Lawsuits Work Under Chapter 13 Bankruptcy

Chapter 13 bankruptcy works differently than Chapter 7. When you file under Chapter 13, some property you get after filing — like a lawsuit settlement or other money — may still be included in your bankruptcy case. This is called “after-acquired property.” Since Chapter 13 repayment plans can last up to five years, it’s pretty common for people to experience changes in their finances during that time.

If you’re in an accident while you’re still in your repayment plan and you receive money from a lawsuit, that money might need to go to your creditors through the bankruptcy trustee. Whether or not you get to keep any of it depends on the details of your case, your state’s exemption laws, and your repayment plan.

Because Chapter 13 is more complex and lasts longer than Chapter 7, it’s a good idea to talk to a bankruptcy attorney if you have any ongoing or potential lawsuits, even if the accident or issue happened after you filed. Due to their length and complexity, Upsolve does not handle Chapter 13 cases.

Lawsuits During Bankruptcy: Other Considerations

If you plan to file bankruptcy while there’s a potential lawsuit that could lead to you recovering money, you’ll need to remember a few other things. If you have a lawyer to handle your bankruptcy case, they’ll most likely make arrangements for you. But if you’re handling the bankruptcy process on your own, here are two more things to think about.

Keeping Your Lawsuit Attorney

If you have an attorney helping you with your lawsuit, make sure you talk to them about your bankruptcy. In some cases, the trustee might take over your case and continue the lawsuit on behalf of your creditors. In other cases, it might make more sense for your lawsuit attorney to stay involved since they’re the person you’re comfortable with and they know the facts of your case.

If you do want your lawsuit attorney to continue working on your lawsuit, you’ll need the bankruptcy court’s permission. You can get that by asking the court to appoint your lawsuit attorney to continue handling the case. The best way to do this is by having your attorney contact the trustee as soon as possible. Your attorney can alert the trustee of the pending claim and tell the trustee they’re willing and able to stay on the case. 

As long as your attorney is appointed by the court, they’ll get paid for the work they put in. If your lawsuit includes potential compensation for personal injuries, your attorney will probably work on a contingency fee arrangement.

Cooperating With the Bankruptcy Trustee

Even if your cause of action isn’t protected by any exemptions, it’s still important that you cooperate with the trustee. This includes working with the trustee when they try to recover money from the lawsuit and give it to your creditors.

Being uncooperative with the trustee is one of the easiest ways to put your discharge at risk. In other words, a strategy of “if I can’t have the money, then neither can the creditors” isn’t a good idea. 

Let’s Summarize…

Generally speaking, you can keep money that you receive from a lawsuit during a bankruptcy case if it’s protected by bankruptcy exemptions. If you recover more money from the lawsuit than is protected by exemptions, you’ll likely have to hand over the excess amount to the bankruptcy court.

The most important thing to remember is that you get plenty of benefits from a bankruptcy, such as the automatic stay and a discharge of your debts. And if you don’t file bankruptcy your creditors can still reach any funds you receive from a lawsuit. So depending on what you’re dealing with, it may still make sense to file for bankruptcy even if that means you’ll lose part or all of the money from the lawsuit.