One of the largest concerns plaintiffs have before litagation is: what happens if the business I’m suing goes bankrupt?

In many situations, the lawsuit pauses immediately because federal bankruptcy law imposes an automatic stay once the bankruptcy petition is filed. That stay can halt hearings, discovery, trial settings, and most efforts to continue collecting against the debtor. For an injury victim, that is a serious disruption. A case that looked strong in state or federal court may suddenly move into a very different system with new deadlines, new procedures, and a new judge overseeing the bankruptcy.

These stays can be contested, but this is typically only successful if the plaintiff knows about the planned bankruptcy filing ahead of time. Acquiring a stay against bankruptcy filings requires a separate request and court approval.

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Do Bankruptcy Filings Erase Personal Injury Claims?

Bankruptcy does not automatically erase a personal injury claim, but it does make it considerably more difficult. One of the most important rules here is 11 U.S.C. § 524(e), which says that “a debtor’s discharge does not affect the liability of any other entity on that debt.” In practical terms, that means a bankruptcy filing may protect the debtor personally, but it does not automatically wipe out claims against an insurer, a co-defendant, or another party that shares legal responsibility for the injury.

This last point matters. In most cases, true source of recovery in an auto accident, refinery or premises liability case is not the defendant’s personal bank account, but an insurance policy or a second liable party. A trucking crash may involve the driver, the carrier, a maintenance contractor, or a freight broker, and a refinery or plant injury may involve the operator, outside contractors, premises owners, or equipment suppliers, depending on liability.

Generally, corporate defendants like refineries or trucking companies handle legal claims via their insurance providers. Bankruptcy can complicate those claims, but it does not necessarily eliminate every path to compensation. For more information on the types of parties involded in large personal injury claims, read our article on third-party liability here.

What Are the Types of Bankruptcy in Personal Injury Cases?

There are three main types of bankruptcy filings when it comes to personal injury cases.

  1. Chapter 7 bankruptcy is a liquidation process, meaning a trustee gathers and liquidates nonexempt assets and distributes proceeds to creditors.
  2. Chapter 11 bankruptcy is generally a reorganization process, most often used by businesses that want to keep operating while restructuring debts.
  3. Chapter 13 bankruptcy is a repayment plan for individuals with regular income, usually lasting three to five years.

For a plaintiff, the difference between the types of bankruptcy can affect whether there are assets available, whether the defendant is still operating, and how the claim must be asserted in the bankruptcy case.

Exceptions to Bankruptcy in Personal Injury Cases

There is a key term in bankruptcy litigation that can make or break a company’s ability to discharge its debts. That term is called dischargeability.

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Under 11 U.S.C. § 523(a)(6), debts for “willful and malicious injury” are excepted from discharge. But the Supreme Court held in Kawaauhau v. Geiger that debts arising from merely negligent or reckless conduct do not automatically fit that exception; the statute is aimed at intentional injury, not ordinary negligence. For individual debtors in Chapter 13, the Code also separately excludes from discharge restitution or damages awarded in a civil action for willful or malicious injury that caused personal injury or death.

That means some injury debts are much harder to wipe out than others, especially when the conduct goes beyond simple carelessness. Another implication is that cases that would be otherwise turned down by a company’s insurance can still be pursued.

In larger injury cases, bankruptcy may redirect claims into a structured compensation system instead of traditional one-on-one litigation. The A.H. Robins bankruptcy led to the Dalkon Shield Claimants Trust, which handled claims through a trust process rather than ordinary direct lawsuits. Likewise, in the Takata airbag matter (the largest, most complex safety recall in automotive history), the Justice Department announced a $125 million fund for physically injured claimants, overseen by a court-appointed special master.

These examples show that bankruptcy can still lead to compensation, but often through a secondary process. The reality is that it becomes much more difficult to get your “piece of the pie” when you are sharing that liquidation of assets with hundreds or thousands of other debtors. Making things worse is that a personal injury victim is an “unsecured debtor” – in other words, someone that has no prior agreement with the defendant, which means they are at the back of the line.

What Happens if The Person I’m Suing Operates in a Different State?

Under 28 U.S.C. § 157(b)(5), personal injury tort and wrongful death claims must be tried in district court. Additionally, the court in question is determined by where the bankruptcy is pending or where the claim arose, depending on the district court overseeing the bankruptcy matter. This means that if your claim happened in Texas, but the company that caused the accident is located in Michigan, then you may have to file and deal with the bankruptcy courts in Michigan.

That one rule is one reason bankruptcies complicate personal injury cases beyond the basic issue of receiving compensation. For more information on how jurisdiction can complicate cases, read our article on jurisdictional complexity here.

Hire a Personal Injury Attorney in Houston, Texas

So, what happens if the business you are suing goes bankrupt? Usually, the lawsuit pauses, the process becomes more technical, and your road to recovery becomes much harder. The best solution is to work with an experienced personal injury attorney before you file. A good attorney helps the plaintiff identify all of the parties that may be involved, providing more avenues to obtain compensation if the responsible party declares bankruptcy.

If you or a loved one have been injured in a refinery, industrial, warehouse, auto or truck accident, you need to contact Hilda Sibrian today. The Law Offices of Hilda Sibrian have served the personal injury victims of Houston for over 22 years, and its competent team of legal professionals are always ready to hear your free consultation.

Hilda Sibrian serves the Houston metropolitan area, including, Sugar Land, Missouri City, La Porte, Beaumont, Pasadena, The Woodlands, The Heights, Bellaire, Kingwood, Baytown and of course Houston proper.

Call our office today or fill out our online contact form for a free consultation.