Colorado Bankruptcy Court Holds That Personal Injury Suit Proceeds May Be Includable In a Chapter 13 Debtor’s Disposable Income
In the recently decided case of In re: Adamson, the Bankruptcy Court for Colorado considered for the first time whether a Chapter 13 debtor’s “disposable income” should include the potential proceeds of a personal injury claim.
As we’ve previously written, a Chapter 13 “wage earner” plan requires the debtor to submit a repayment plan. The amount the debtor must pay each month over a set period of years (typically three to five years) is distributed by the bankruptcy trustee to the creditors who don’t hold a mortgage or other lien on the debtor’s property (so-called “unsecured” creditors). The monthly amount is determined by calculating the debtor’s current and reasonably expected “disposable” income; that is, the amount left over each month after payment of household bills and other specified expenses.
The proceeds from the sale of many of the debtor’s assets are also available for creditors, though certain assets are off limits. That includes personal injury claims.
Because Chapter 13 is only available to individuals with regular income, the monthly payment calculation is ordinarily pretty straightforward. Certain forms of income are excluded by law. While court approval of the plan is required, a substantial percentage are accepted without controversy.
However, the trustee does have the right to object to the plan. Common objections include:
- The amount or type of expenses of the bankruptcy case, including legal fees.
- The trustee’s proposed abandonment of a particular asset instead of selling it for the benefit of creditors.
- The proposed discharge of a particular debt upon completion of the plan.
In this case, the trustee objected to the calculation of disposable income. He didn’t dispute that the debtor’s personal injury claim itself was exempt property, nor did he contend that the amount of proceeds from the pending injury suit are currently known. He argued, however, that Adamson’s Chapter 13 plan should provide that potential proceeds be considered as disposable income if and when they are received. Unlike child support payments or those related to COVID-19, personal injury claim proceeds are not among the enumerated types of income expressly excluded from the disposable income calculation.
If and when the proceeds are received, the trustee stated that his usual practice in such cases is to confer with the debtor to ascertain his then-current needs and attempt to reach an agreement to amend the debtor’s disposable income calculation. If the proceeds are not reasonably necessary for the support of the debtor and his dependents, he contended that they should be made available to creditors. The debtor countered that since the proceeds will come, if at all, from an exempt asset (the injury claim), they should likewise be excluded. Further, he contended that such proceeds are not income at all.
While acknowledging that some other Bankruptcy Courts around the country have agreed with Adamson’s arguments, the Court sided with the trustee. It directed Adamson to file an amended plan which includes the prospective proceeds of his personal injury claim.
What Adamson May Mean To You
If you are a Colorado resident considering bankruptcy, remember that thanks to the so-called “means test” you may have to file under Chapter 13 of the Bankruptcy Code. As such, if you are pursuing (or considering pursuing) a personal injury claim from an auto accident or other mishap, you should be aware of the Adamson decision and its potential impact on your bankruptcy case. The Court’s decision requires consideration of a future (and thus unknown) event, but it is one that may have a significant impact on your Chapter 13 bankruptcy filing.
The Importance of Experienced Bankruptcy Counsel
If you’re a Colorado resident who’s struggling with debt and have a personal injury claim, you owe it to yourself to consult with an experienced bankruptcy attorney. The Colorado Bankruptcy Law Group, LLC has represented in Chapter 13 cases for almost 10 years.
You can schedule a free consultation by clicking here.