Personal injury claims and bankruptcy

When you’ve been declared bankrupt, control of your finances passes to the Official Receiver (OR) or Trustee appointed to deal with your case. Under the rules of bankruptcy, you must tell the OR about any changes in your financial circumstances during your bankruptcy – including windfalls such as compensation received as a result of a personal injury claim.


Most windfalls are taken by the OR and used to repay your creditors. However, this is not always the case for personal injury compensation. Whether or not you’re required to hand over your claims money depends on the nature of your compensation payment. This article from bankruptcy advice service, Bankruptcy Clinic, gives an overview of the key facts.


Loss of income payments

If you’ve had to take time off work, or away from running your business, because of an injury or illness that wasn’t your fault, the court may rule that you should be reimbursed and compensated for your loss of earnings. This type of payment will be treated as a standard financial windfall and in the vast majority of cases, you’ll need to pay the money over to the OR.


Looking on the bright side, however, the money may be enough to clear your debts. If this happens, you could be discharged from your bankruptcy early.


Pain and suffering payments

The other type of personal injury payment is for pain and suffering, which compensates you for the physical effects of the illness or injury you sustained. As well as compensation for the unpleasantness of the experience, this type of payment often includes money to help you recover or regain a better quality of life. For example, by funding specialist rehabilitation services, buying an adapted car if you’ve become disabled, or paying for domiciliary care.

– Related post: The Role Of Expert Witnesses In Boston Injury Cases.


In most cases, you’ll be allowed to keep this element of your personal injury claim payment. However, unless the claims company clearly splits out your compensation into amounts for loss of earnings and pain and suffering, the OR may try to claim it from you. If this happens, you’ll have to go back to the claims company and demand a clear breakdown of each aspect of your compensation payment.


Pending personal injury claims

If you’re awaiting the outcome of a personal injury claim at the time of declaring yourself bankrupt, according to Macgillivray an expert in this field, you’ll need to declare this on your bankruptcy application form. Then, if the claim is settled during your bankruptcy period, it will be dealt with as set out above, depending on the nature of your compensation.


Receiving a pay-out after discharge

Whether or not you can keep your compensation will depend on when you made your personal injury claim. If the claims process started before you were declared bankrupt, or during your bankruptcy period, you’ll still need to tell the OR if you receive a compensation payment after your bankruptcy has been discharged.


Your payment will then be treated as set out above, i.e. you probably won’t be able to keep the loss of earnings element. This is because the payment will be treated as an ‘acquired asset of bankruptcy’, which means you could have theoretically received the money before or during your bankruptcy period, in which case it would have passed to the OR.


However, if you make a personal injury claim after your bankruptcy has been discharged, you’ll be allowed to keep any compensation that you’re awarded. This rule applies to all financial windfalls that you receive after your bankruptcy, such as redundancy and inheritance payments, even if you’re still subject to an Income Payments Agreement or Order.


For this reason, you may want to hold off making any personal injury claims until after your bankruptcy has been discharged, as even if the OR is aware of an accident or illness for which you could claim, they can’t oblige you to do so.


A word of caution

It may be tempting not to tell the OR about any compensation claims that are pending or that pay out during your bankruptcy. However, there could be serious consequences if they find you out. Honesty is always the best policy, even if you have to hand over some or all of your compensation payment to the OR for the benefit of your creditors.


Find out more

For more information about any aspect of bankruptcy, or for expert debt advice, please contact Bankruptcy Clinic.

  • Call free from a landline on 0808 168 7389
  • Call 01625 462 770 from a mobile.
  • Fill in our quick enquiry form to request a call back from a debt adviser.

Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.

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