Accident victims may face challenges when the at-fault driver files bankruptcy. Here’s what you need to know to protect your injury claim.
Following an auto accident, an injured victim can usually file a claim against the at-fault driver’s insurance company to receive compensation for their injuries and related losses.
Filing injury claims almost always involves a degree of stress and anxiety.
Claimants must work with corporate insurance companies and deal with the insurance adjuster’s tactics. Sometimes car accident victims even have to deal with the uncertainties of a lawsuit and trial.
When the at-fault driver files for bankruptcy after an accident, the victim’s worries increase. Concerns about whether the negligent driver will have any funds to pay for damages are real and distressing.
Car accident victims must focus on the compensation they deserve. Here’s what you need to know if the at-fault driver files bankruptcy before your injury claim is settled.
Bankruptcy Proceedings in General
Bankruptcy is a special type of legal proceeding used when people can’t pay their outstanding debts.
A bankruptcy action is initiated by filing a petition in federal court. The court examines the petitioner’s assets and decides what can be used to repay all or a portion of the debt.
Individuals typically file either Chapter 7 or Chapter 13 bankruptcy.
People file Chapter 7 bankruptcy when they are unable to pay back unsecured debts, or those that aren’t backed by any asset.
Examples of unsecured debts include:
- Medical bills
- Credit card balances
- Utility bills
In a Chapter 7 proceeding, certain assets are sold to help pay off these types of bills. If the debtor doesn’t have the assets to pay their debts, then the court may discharge the debts. If the debtor’s obligations are discharged, they are protected from further collection actions on the debts.
Sometimes people have too much money to qualify for Chapter 7 bankruptcy. In these situations, the debtor files for Chapter 13 bankruptcy, which is essentially a court-ordered repayment plan.
An advantage of Chapter 13 proceedings is that the court allows debtors to keep their property.
Insurance Companies Not Off the Hook
If you’re injured in an auto accident and file an insurance claim with your own insurance company, then your insurer must consider your claim. The company is not relieved of its duty to accept a claim and review it just because the at-fault driver filed for bankruptcy.
Upon review, the company can decide to decline the claim, enter into settlement negotiations, or compensate you according to your policy limits.
Likewise, if you’re pursuing the at-fault party’s insurance company for compensation. You file a claim with the insurer, and it will investigate the claim and either deny the claim or pay you according to the at-fault driver’s policy limits.
Again, the insurer cannot deny a claim outright or refuse to accept one because of a bankruptcy petition.
No-Fault vs At-Fault States
State laws help determine whether you file an injury claim with your own insurance company or the insurer of the driver responsible for the accident.
In no-fault insurance states, drivers file injury claims with their own insurer, regardless of who caused the accident.
In at-fault states, injured victims file insurance claims with the at-fault driver’s insurance company. That driver’s bodily injury (BI) liability coverage will pay for the victim’s medical expenses, lost wages, and pain and suffering up to the policy limits.
For bankruptcy purposes, if you file a claim with the at-fault driver’s insurance company, you will sometimes need approval from the court overseeing the driver’s bankruptcy proceeding.
Automatic Stays In Bankruptcy
Some states impose an automatic stay as soon as a debtor files bankruptcy. The stay works to stop any claim that a creditor files against a bankrupt debtor or the debtor’s property.
For example, if a car accident victim files a claim with a bankrupt driver’s insurance company, the bankruptcy court may halt the claim from proceeding.
To lift the stay and continue with the claim, the victim must file a motion with the bankruptcy court. Your attorney, if applicable, can file a lift stay motion on your behalf.
The court will normally grant the motion and lift the stay so long as the debtor has an auto insurance policy with enough liability coverage to pay for your injuries.
If the court denies the motion, you’ll be prohibited from continuing with the injury claim.
While some states impose an automatic stay against all creditors, others don’t apply one or only do when the debtor gets a court order authorizing one.
If the at-file driver’s debts are discharged, it means the bankrupt driver is not personally responsible for repaying them.
The discharge doesn’t automatically let the insurance company off the hook. It just means you can’t pursue the-at fault driver personally for the difference if the insurance coverage isn’t enough to cover your damages.
Debts That Aren’t Dischargeable
There are two situations involving car accidents when a court will not discharge a personal debt.
The first is if the bankrupt driver was driving under the influence and caused another person’s death or injury.
The at-fault drunk driver is responsible for paying:
- Criminal fines
- Court fees
- Injury compensation
The court will also not discharge a debt when a bankrupt motorist wilfully and maliciously causes an accident and injures another person or someone else’s property.
“Willful” means someone does something on purpose.
“Maliciously” means someone does something with the intent to do a wrongful act or the intent to injure a person.
Willful and malicious drivers cannot discharge responsibility for personal injury or property damage claims.
Example: Willful and Malicious Destruction
Joe recently declared bankruptcy.
His girlfriend of five years suddenly breaks up with him for a new guy, Mark. Joe is angered and immediately holds a grudge against the new boyfriend.
He is driving through town one night when he sees Mark’s car parked outside a diner. Joe pulls into the diner’s parking lot and points his vehicle towards the passenger side of Mark’s auto.
Joe stops, tightens his seat belt, and then guns the car directly into Mark’s. The crash results in extensive damage to both autos. Nobody is hurt in the collision.
Here, Joe’s actions are both willful and malicious. He crashed into the car to retaliate against Mark for stealing his girlfriend.
Joe is personally responsible for compensating Mark. The nature of his actions means that the cost of fixing Mark’s car are not dischargeable in bankruptcy court.
If the debtor can’t afford to pay for damages that can’t be discharged, they can still file for Chapter 13 bankruptcy.
The debtor driver then works with the court to set up a repayment plan over a three to five-year period. If the debt remains after the given time period expires, then the debtor driver can always file another Chapter 13 bankruptcy to pay off any amounts still owed.
Compensation Over Policy Limits
Most personal injury car accident claims can be fully covered within the at-fault driver’s policy limits. But this isn’t always the case.
There are times when an at-fault driver has no insurance whatsoever, or the cost associated with your injuries exceeds the coverage limits of the applicable policy.
Uninsured or Underinsured Coverage
Uninsured motorist coverage (UM) or underinsured motorist coverage (UIM) may help cover your damages when the at-fault driver doesn’t have insurance or the cost of your injuries exceeds the at-fault driver’s policy limits.
Uninsured Motorist Coverage helps pay for your damages when a driver hits you without liability insurance. More than 20 states require UM coverage. Insurance companies have to offer it in other states, but drivers don’t have to buy it.
Underinsured motorist coverage pays for your injuries when the at-fault driver has too little insurance to cover all of your injury costs. In some states, UIM is included within UM coverage. Only a few states mandate drivers to carry UIM coverage.
If you file a UM or UIM claim, the insurance company is legally required to compensate you for those injuries the at-fault party would have had to, but for the lack of insurance or the lack of higher policy limits.
Despite this requirement, however, some insurance companies will fight you tooth and nail and say that you can’t use these policies in cases involving bankruptcy. But the companies have a legal duty to honor them.
Case Summary: Insurance Company Required to Honor UIM Coverage
Hershel and Charlotte Easterling filed a lawsuit in Chilton Circuit Court against Ashley McCartney and her insurance company after suffering serious injuries in a car accident.
The Easterlings accused McCartney of causing the accident. Ashley’s Insurer was Progressive Specialty Insurance Company.
The Easterlings included their own insurer (also Progressive) in the lawsuit because they were unsure whether the limits on McCartney’s Progressive policy would cover all of their expenses.
Charlotte passed away soon after the court filing.
Before the case reached trial, McCartney filed for bankruptcy. The Circuit Court released her from the suit since she no longer had any assets to compensate Easterling.
The Circuit Court also agreed to remove Easterling’s insurance company from the case. It said that the UIM policy didn’t apply since Easterling could no longer receive payment from McCartney.
The reasoning was that UIM coverage only comes into play if the claimant is “legally entitled” to recover damages from the at-fault driver. Because McCartney was bankrupt, Easterling was no longer “legally entitled” to collect directly from her.
Easterling and his attorney appealed the Circuit Court decision. On appeal, the Alabama Supreme Court ruled in Easterling’s favor.
The Court noted that the UIM policy did in fact apply and said claimants could rely on these policies for injuries above the policy limits on an at-fault driver’s insurance policy. This is true even in cases involving an at-fault driver’s bankruptcy.
Ashley McCartney’s bankruptcy did not prevent her insurer, and Hershel Eaterling’s insurer, from fully compensating Easterling under the applicable insurance policies.
The Court also stated that bankruptcy laws were not meant to benefit third parties like insurance companies.
While the above case involves a UIM policy, the case law would apply equally to UM policies.
Suing the At-Fault Party
Lawsuits provide injured parties an avenue to pursue payment for injuries not covered by insurers. Victims normally file these suits against the at-fault party.
If the at-fault party is bankrupt, though, the person will not have the available assets to compensate the injured driver for any losses above insurance policy limits. This means an accident victim may wisely decide not to pursue litigation, or rely on it in limited circumstances.
Get Help With Complicated Claims
Auto accident cases involving a bankrupt driver can grow complex. This is especially true considering that there are two types of cases involved – the personal injury claim and a bankruptcy proceeding in federal court.
At times, an injured driver may have to take a specific action in federal court to advance an issue in the injury matter. An example is the injured victim filing a motion to lift a stay to move forward with filing a claim.
Further, depending on the bankruptcy timing, receiving any compensation at all can become questionable. The difficulty in receiving payment is heightened if the at-fault driver was underinsured or had no insurance at all.
Severe car accident injuries are high-dollar claims that only get more complicated when a bankruptcy occurs. Insurance adjusters look for reasons to deny claims or offer lowball settlements to save the insurance company money.
It’s a good idea for you to get the assistance of a personal injury attorney for complicated auto accident cases. An injury lawyer will better understand bankruptcy matters and is better situated to negotiate with adjusters and insurance companies.
The good news is that most injury attorneys work on a contingency fee basis. A contingency fee means your attorney won’t collect any money unless they successfully negotiate your claim settlement or win in court.
Most attorneys also offer a free consultation, where the two of you speak about your case free of charge. You’ll have a better feel for your case after this meeting and a better understanding of the options at your disposal.
Do yourself a favor and get the legal help you need. Don’t let a bankruptcy filing give the insurance company an excuse to deny your accident claim.
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