The Personal Injury Exemption: Protecting Compensation

Emergency Workers at Car Crash

When a personal injury happens, it is often a major event in a person's life. In addition to physical and emotional impacts of an injury, there are frequently financial consequences. With major injuries, an award of compensation may be designed to at least partially relieve a long-term financial burden. For a person owed money in compensation for an injury, that money may be one of the person's most valuable assets. Fortunately for North Carolina residents filing bankruptcy, North Carolina law provides a generous exemption to protect that compensation.

The exemption, in NCGS 1C-1601(a)(8), provides that a person may exempt:

(8) Compensation for personal injury, including compensation from private disability policies or annuities, or compensation for the death of a person upon whom the debtor was dependent for support, but such compensation is not exempt from claims for funeral, legal, medical, dental, hospital, and health care charges related to the accident or injury giving rise to the compensation.

This is one of only a few North Carolina exemptions that has no express dollar cap, although with the limitation that debts related to the injury are not prevented from collecting against the injury compensation. The North Carolina General Assembly has recognized that compensation awards are intended to make the injured person whole, not provide a windfall for that person's creditors.

Two points are worth further discussion: the scope of a personal injury and the consequences of omitting an injury from a bankruptcy petition.

What is a Personal Injury?

As an exemption without a dollar cap, the personal injury exemption is attractive as a means to protect a lawsuit recovery. However, "personal injury" is not an unlimited term. The exemption cannot be used to exemption claims for economic loss, breach of contract, or other similar damages.

At the same time, North Carolina's exemption is not as limited as some jurisdictions that only protect compensation for bodily injury. Personal injury is a broader term than bodily injury. Certain types of mental and emotional harms may be a personal injury, despite no physical bodily harm existing. Therefore, the North Carolina exemption can be used to protect compensation for non-bodily personal injuries such as mental and emotional distress.

The danger of non-disclosure

In bankruptcy, not disclosing an asset is never a good idea. However, personal injuries seem to have their own set of disclosure issues. One issue is that many prospective debtors are unclear when a personal injury claim becomes an asset. It's incorrect that one needs to obtain a judgment or file a lawsuit before a personal injury claim becomes an asset. In most situations, the claim and the asset exist from the moment of injury. As the North Carolina exemption is not limited by dollar amount, the fact the personal injury claim has no dollar value associated with it becomes unimportant. Claiming a possible cause of action as exempt protects the debtor's rights regarding the injury, but does not commit the debtor to bring a suit or otherwise pursue the claim.

Among the consequences of non-disclosure, two merit particular mention. For one, when a trustee discovers a personal injury claims that has not been disclosed or claimed exempt, he or she may attempt to pursue the claim to pay creditors instead of to compensate the injured debtor. Additionally, a non-disclosure in bankruptcy may thwart the debtor's ability to successfully recover compensation on the claim after the bankruptcy. Under a doctrine known as judicial estoppel, a defendant in a later lawsuit can demand that the plaintiff be forced to maintain a consistent position with his or her prior bankruptcy petition and schedules. In effect, if a debtor denies being owed money at the time of the bankruptcy (by non-disclosure), he or she is not allowed to change their position and later sue claiming money is owed.

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Emergency Workers I by Jason Burwen, licensed under a creative commons license, original at http://www.flickr.com/photos/jasonized/536774512.

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Knightdale Attorney Erich Fabricius represents clients in bankruptcy, consumer debt litigation, and in small business matters. He is licensed to practice law in North Carolina. His blog posts consider matters related to debt, bankruptcy, litigation, and other legal issues in North Carolina.

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