The American Bankruptcy Institute’s data for 2016 indicated that there were 11,287 cases of Chapter 7 bankruptcy in Maryland. Victims in severe personal injury cases are likely to experience financial problems as often their income may fall due to an inability to work; meanwhile, they may be accumulating significant medical bills and credit card debt. If the process of litigating the case is lengthy, the individual may be forced into bankruptcy during the injury case. Maryland’s bankruptcy exemption laws apply here, which are slightly different than the federal exemption laws. These laws are what determine which assets a debtor may retain in the liquidation process. Awards specifically for pain and suffering and future lost wages are generally shielded from liquidation; however, awards for medical bills, past wage losses, and other economic losses are generally allocated for distribution among the creditors.
In consumer bankruptcy cases, the Maryland statute defines value as the fair market value of the debtor’s property upon the date of filing or when the judicial process is in effect. The following are considered exempt property in these bankruptcy matters:
- Clothing, apparel, books, tools or machines needed for occupational purposes that are under $5,000 in value
- Monies paid in cases of illnesses, injuries, or death which includes retribution for future losses of income; included are those payable from insurance, court decisions, benefit programs, and arbitration
- Cash or assets of any variety up to a limit of $6,000
- Monies from court-ordered child support
Awards resulting from personal injury claims typically include economic or “specific” damages composed of medical expenses, past losses of wages and other quantifiable expenses. These damages are not covered under exemptions because they are likely attributable to losses which led to the need for seeking bankruptcy protection. When an injury case is pending and the award for non-exempt damages is likely to be small, the court trustee may consider the award to be insignificant or inconsequential and proceed without considering it as part of the estate. Debtors also may use their $6,000 asset or cash exemption to shield economic awards.
The U.S Bankruptcy Court for Maryland addressed this issue in the 2010 Chapter 7 case of Robert D. Short. In this matter, Short disclosed a pending injury claim award of $500,000. The court objected to allowing an exemption for the economic portion of the award. The Trustee explained that awards such as those for medical bills would be discharged during the bankruptcy. Allowing these awards to be exempt gives the Debtor an economic “windfall at the expense of his creditors…” A test can be applied to determine what portion of an award is exempt by differentiating that which is for injury to the person, from that which is for the property of the debtor.