Receiving a Settlement After Bankruptcy

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If you receive money or property through a settlement after filing for bankruptcy, whether you can keep the settlement proceeds depends on:

  • the type of settlement received
  • when your claim or cause of action arose
  • the exemption laws of your state, and
  • whether you filed for Chapter 7 or Chapter 13 bankruptcy.

Settlements After Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, almost all property you own becomes property of the bankruptcy estate. This means that unless you can fully exempt an asset, the bankruptcy trustee can sell it to pay your creditors.

In addition to your tangible assets, property of the estate also includes all legal and equitable claims (such as a cause of action for a lawsuit) you have at the time of filing your case. Further, certain settlements or property interests are considered property of the estate even if you become entitled to them within 180 days of your filing date. 

To learn more about what happens to your property in bankruptcy, visit our Property and Exemptions in Bankruptcy topic area.

Lawsuit Settlements

When you file for bankruptcy, you must list all of your legal claims and causes of action (such as personal injury or breach of contract claims) as assets on your bankruptcy schedules. If you receive a settlement from a lawsuit after filing for bankruptcy, your settlement proceeds may be considered property of the bankruptcy estate even if your bankruptcy case has already been closed.

In general, whether a settlement is property of the bankruptcy estate depends on the date of injury. If your claim arose prior to your bankruptcy, any settlement you receive after you file your case will usually be property of the bankruptcy estate. Whether you can keep your settlement proceeds depends on the type of your claim and the exemption laws of your state. However, most states typically have exemptions specifically designed to protect a certain amount of personal injury recovery.

Inheritance, Death Benefit, Property Settlement, and Divorce Proceeds

Certain types of settlements or property interests are considered property of the bankruptcy estate even if you become entitled to receive them within 180 days after filing your case. These include money or property you become entitled to through an inheritance, death benefit plan (such as life insurance), property settlement agreement with your spouse, or a divorce decree.

Keep in mind that whether your settlement is property of the bankruptcy estate depends on when you became entitled to it, not the date you actually received the proceeds (which can be months later).  

Settlements After Chapter 13 Bankruptcy

In addition to the above, property of the estate in Chapter 13 bankruptcy also includes any settlements or property you acquire during the pendency of your case (which typically lasts three to five years). But unlike in Chapter 7 bankruptcy, the Chapter 13 trustee does not take your assets to pay your creditors.

In exchange for keeping your property, you must pay your unsecured creditors an amount equal to the value of your nonexempt assets. This means that if you receive a nonexempt settlement during Chapter 13 bankruptcy, you will typically be required to increase the amount you are paying towards your unsecured debts in your repayment plan.

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