What Happens to a Settlement I Receive After Bankruptcy?

If you receive money from a lawsuit or insurance policy after bankruptcy, the money might belong to your bankruptcy estate.

By , J.D. · California Western School of Law

Sometimes someone will receive a money or property settlement after filing for bankruptcy. Although a filer can keep most types of property acquired after filing, settlement proceeds are an exception. Whether a settlement received after filing a bankruptcy case is yours to keep will depend on:

Settlement Received After Filing for Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, almost all property you own becomes part of the bankruptcy estate. Unless you can entirely protect an asset using a bankruptcy exemption, the bankruptcy trustee appointed to oversee your case can sell it to pay your creditors.

The estate property also includes a handful of assets that you become entitled to after filing, specifically, during the 180 days following the filing of your bankruptcy case. These things can be quite valuable, such as inheritance, lottery winnings, and more

Lawsuit Settlements in Bankruptcy

Legal claims, including personal injury and breach of contract claims, are included in the assets you must list on your bankruptcy schedules when you file for bankruptcy. Whether a settlement is the property of the bankruptcy estate will depend on the date of injury.

If your claim (injury or property damage) arose before your bankruptcy, any settlement you receive after you file your case will usually be the property of the bankruptcy estate. Whether you can keep your settlement proceeds will depend on the type of claim and the exemption laws of your state. Most states typically have exemptions specifically designed to protect a certain amount of personal injury recovery.

Inheritance, Death Benefit, Property Settlement, and Divorce Proceeds in Bankruptcy

Some settlements or property interests are the 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), a property settlement agreement with your spouse, or a divorce decree.

Keep in mind that whether your settlement is the property of the bankruptcy estate depends on when you became entitled to it. You won't look at the date you received the proceeds which can be months later, but rather when you became entitled to receive them.

Example. Assume you filed for bankruptcy on January 1, 2020. Your grandfather passed away on April 15, 2020, and left you $200,000. But you didn't receive the money until September 15, 2020. You became entitled to the funds on April 15, 2020. Because the entitlement date is within 180 days of your filing date, it's the property of the bankruptcy estate.

Settlement Received After Filing for 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 your case (which typically lasts three to five years). If you receive a nonexempt settlement during Chapter 13 bankruptcy, you'll likely have to pay more towards your unsecured debts in your repayment plan.

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