How Outstanding Debt May Affect a Personal Injury Settlement

Californians tend to carry significant debt. According to the Federal Reserve Board of New York, the 2019 average debt for California residents was $73,400, including auto loans, credit cards, mortgages, and student loans.

Debt can impact many parts of a person’s life. Personal injury victims may wonder how their debt may impact compensation from a personal injury settlement or courtroom verdict.

Below, Arnold Law Firm explains how debt is handled in a personal injury case. Call our personal injury attorneys in Sacramento for a free legal consultation.

Can a Personal Injury Settlement Be Garnished?

Monetary compensation granted under a personal injury settlement is generally considered exempt from garnishment under California law.

However, it is important to keep settlement money separate from your other income. If you deposit a settlement check into your bank account, it may be possible for a creditor to secure a court order to garnish that account. Fortunately, creditors are limited to garnishing less than 25 percent of a family’s disposable income.

Who Can Put a Lien on a Personal Injury Settlement?

Medical providers, health insurance companies, lenders, and other third parties may be able to place a lien on your settlement money from a personal injury claim.

If the cost of treating your injuries exceeds the limits of the at-fault party’s insurance policy, you may need to use your own health insurance to continue medical treatment. However, the insurance company may place a lien on any money you may receive from a settlement to cover what they paid for your treatment.

If you have accounts that have been transferred to debt collectors, you may be concerned about them coming after your settlement money. However, collectors generally cannot place a lien on an account unless you are behind on payments and the account is in a delinquency status.  

The IRS may place a lien on your settlement to recover outstanding tax debt or even student loan debt. Unlike other lenders, the IRS has more leeway in how it can collect the money you owe. The government can access any money in a bank account, regardless of where it came from. Similarly, the IRS is not subject to garnishment limitations like other lenders are, meaning they may take more of your money in one fell swoop.

Personal Injury Settlements and Bankruptcy

In both Chapter 13 and Chapter 7 bankruptcy filings, a person may be able to protect assets the state deems essential for a fresh start.

Under System 1 in California’s Chapter 7 bankruptcy, damages awarded for a personal injury are generally fully exempt unless a creditor obtained a judgment against you before you filed for bankruptcy.

Under System 2, damages awarded for a personal injury are exempt up to a certain amount. However, if any part of the compensation was awarded due to pain and suffering, that monetary compensation is often not exempt under California’s bankruptcy laws.

For Chapter 13 bankruptcy, in which the debtor works out a repayment plan with creditors, you are expected to repay some of the debt, so a personal injury settlement may be used to repay that debt.

How to Protect Your Personal Injury Settlement

The best way to protect your personal injury settlement is to pay your debts as soon as possible. You may be able to negotiate a repayment plan with your creditors in advance that may not be as burdensome as paying off your debts in one lump sum. Consider consulting with an advisor about California laws that offer personal injury victims some protections.

Call an Experienced Attorney

The stress of a personal injury claim can be amplified by concerns about outstanding debt from credit cards or student loans. Being informed and planning ahead is important.

Call the Arnold Law Firm today to discuss your situation and see how we may be able to help you. We are committed to pursuing maximum compensation to help you during this difficult time. The consultation is free and there are no upfront fees for our services.

Have questions? Call us today at (916) 777-7777.