Can Chapter 13 Take A Settlement Check?
So you’re in a Chapter 13 bankruptcy, doing your best to stick to the plan – and then out of nowhere, you get a settlement check. It could be from a car accident, an injury, a lawsuit, whatever.
At first, it feels like a lucky break. But then the worry kicks in: “Am I even allowed to keep this?”
Totally normal reaction. Bankruptcy can feel like it has rules on top of rules, and throwing a settlement into the mix can be confusing fast.
The truth is, Chapter 13 doesn’t always let you keep extra money that comes your way.
In this post, we’ll explain if Chapter 13 can take a settlement check.
Can Chapter 13 Take A Settlement Check?
Yes, Chapter 13 can take some or all of your settlement check to pay down your debts, especially if your original plan doesn’t cover 100% of what you owe.
When you’re in Chapter 13, you’ve basically made a deal with the court to follow a payment plan to repay creditors over three to five years, based on what you can afford. But if you suddenly come into extra money (like a lawsuit or insurance settlement), the court may consider that.
So that money becomes part of what’s called your “bankruptcy estate,” which basically means the court gets a say in how it’s used.
That said, some portions of a settlement like compensation for medical expenses, may be exempt. But settlements for pain and suffering or lost wages are usually not exempt and can be used to repay debts.
Do I Have To Report My Personal Injury Settlement Check?
Yes, you MUST report it. No question about it.
The court expects full honesty and transparency when you file for bankruptcy.
If you get a personal injury settlement (or any type of settlement) you have to tell your bankruptcy attorney and your trustee. It doesn’t matter if it’s big or small. If you don’t report it, you could run into serious legal trouble.
And here’s another thing to keep in mind: even if you haven’t gotten the money yet, but you know it’s coming, you still need to disclose it.
It’s always better to be upfront. Trying to hide it will only cause more problems later.
Sometimes the insurance company might directly mail the settlement check to the trustee.
Also Read: Can I File Chapter 7 Before 8 Years?
What Happens If You Don’t Disclose The Check
If you fail to report your settlement check, you’re playing with fire.
The bankruptcy process is all about transparency. If the court finds out that you’ve hidden assets or income, they can take action. This could include:
- Your bankruptcy case could get thrown out
- You might lose your right to wipe out (discharge) your debts
- You could face charges for bankruptcy fraud
Not worth it.
Even if you’re scared the court might take the money, the better move is to be honest from the start and work with your attorney on a plan.
You might be surprised how much of the settlement you can actually keep – legally.
What To Do If You’re Expecting Or Just Received A Settlement
So the check is on the way (or already in your hands), and now you’re wondering what to do next. Here’s what you should do to keep things on track and keep your case safe:
#1 Notify Your Bankruptcy Attorney Immediately
Call your bankruptcy attorney first. You don’t want to waste time here. Let them know you’ve received or are expecting a settlement check.
Your attorney will guide you through the next steps.
You might be thinking, “But I don’t want to give up my settlement!” Don’t worry – your attorney will help you understand exactly what part of the settlement (if any) needs to go toward your Chapter 13 plan.
They’ll look at the details and help you figure out what’s fair and what’s necessary.
Also Read: 341 Meeting Did Not Go Well
#2 Gather Paperwork
Next, you’ll need to pull together all the paperwork related to your settlement.
This means things like:
- The actual settlement agreement.
- Any documents showing how much you were awarded.
- Correspondence with the insurance company or whoever paid out the settlement.
Having everything ready will make it easier for your attorney and the bankruptcy court to understand exactly what you’re dealing with.
#3 Prepare To Amend Your Plan, If Needed
Once your attorney has all the information, they’ll likely need to amend your Chapter 13 plan to account for the new settlement money.
This could mean adjusting your monthly payments or figuring out how much of the settlement goes to pay off creditors. This is a normal part of the process.
The court will want to make sure creditors get their fair share, but they also don’t want to leave you destitute.
Your attorney will advocate for you and help keep things as fair as possible.
#4 Don’t Spend Anything
You might be really excited about the settlement check. After all, it’s extra money!
But don’t start spending it yet. Until everything is sorted out with your bankruptcy plan, you can’t make any big purchases with that money. If you do, it could complicate things.
Hold off on spending until your attorney gives you the green light.
This way, you avoid any potential problems with the court.
Also Read: What Happens If the Trustee in Chapter 7 Denies Your Bankruptcy
Bottom Line
Your personal injury settlement check can be taken by the Chapter 13 bankruptcy trustee to pay off your debts.
We urge you to be honest, move fast, and work closely with your bankruptcy attorney.
The court may take some of the money, but that doesn’t mean you’ll lose all of it. In many cases, you can protect a portion or use it in a way that helps you, like catching up on bills or even wrapping up your case sooner.
Whatever you do – don’t spend it and hope no one notices.