Bankruptcy and personal injury claims – what is the effect?

Bankruptcy and personal injury claims

By Julia Bossert

Julia Bossert Forensic Services

Often, personal injury and wrongful death compensation claims can take years to resolve, during which time the injured person or surviving spouse may or may not be able to continue working.  For those who are unable to continue working the financial strain can be considerable, particularly where they don’t have an alternative source of income available (eg. workers compensation benefits, payment advances from the insurer, etc).

Unfortunately, it is not uncommon to see situations where injured / surviving parties lose the ability to service existing debts (eg. business or taxation liabilities) and / or incur significant levels of debt in order to fund their living expenses, and bankruptcy becomes a distinct possibility.

What is the role of the trustee in bankruptcy in the litigation process?

For most types of litigation, a trustee in bankruptcy is required to decide whether to continue or discontinue the proceedings.  This is not the case for personal injury or loss of financial dependency claims.  Section 60(4) of the Bankruptcy Act 1966 specifically allows a bankrupt to continue these proceedings in their own name.

What happens to the compensation proceeds?

Section 116(2)(g) or the Bankruptcy Act 1966 identifies compensation proceeds resulting from personal injury and wrongful death claims as excluded from the bankrupt estate, regardless of whether they were received prior to or during the period of bankruptcy.

That means that the compensation proceeds are not required to be distributed to the creditors of the bankrupt estate and remain the property of the plaintiff / bankrupt.

What is the compensation proceeds were used to purchase a house or other assets?

Pursuant to Section 116(3) of the Bankruptcy Act 1966, assets which were purchased with compensation proceeds providing “… the whole, or substantially the whole, of the money paid for the purchase…” retain their status as exempt from being included in the bankrupt estate.  For example, if a bankrupt purchased a house using their compensation proceeds, then that property would not vest in the trustee of the bankrupt estate.

Does the plaintiff’s bankruptcy have any effect on the calculation of economic loss?

If the plaintiff was bankrupt but continuing to work at the time of their injury, they may have been required to be making income contributions from their employment / self-employment earnings towards their bankrupt estate.  If this was the case, then it may be appropriate to deduct the amount of these compulsory contributions from the calculation of the plaintiff’s notional (“but for” the injury) earnings.

Want to know more?

If you want to know more about bankruptcy and personal injury claims and their effect, please contact Julia Bossert our Forensic Services Associate Director for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.



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