Can Creditors Take my Personal Injury Settlement?

Personal Injury Settlements and Creditors’ Liens

Whether you recently received a personal injury settlement or expect one to arrive soon, it’s vital to protect these funds.

Fortunately, monies from injury or workers’ compensation settlements are considered exempt from many liens.

In plain English, most creditors cannot take these monies via bank garnishment.

Beyond this, you may be able to keep the entire settlement even in the event of filing bankruptcy, even if the settlement amounts to thousands of dollars.

That said, you need to take some simple steps to ensure your personal injury settlement is safeguarded.

Is It Possible for Your Personal Injury Settlement to Be Garnished?

Creditors can seize assets from debtors via garnishment, a legal proceeding allowing them to take assets to satisfy a judgment.

This must follow due process, though. Creditors cannot start taking assets without first obtaining a legal judgment. Additionally, they must file a garnishment and ensure that it is properly served. The resulting garnishment permits collection of the judgment from a debtor’s assets.

In some states, garnishment is completely prohibited, which is ideal for consumers. Other states, however, allow for the full garnishment of settlements. Many states fall somewhere in between, allowing reasonably open garnishment of funds.

If you are expecting a personal injury settlement and are concerned about losing part of it to garnishment, check the laws in your state of residence.

Who Can Place a Lien on Your Personal Injury Settlement?

In broad terms, a lien is a court order placed on the personal property of one party to satisfy a debt owed to a third party. In a personal injury settlement, the personal property is the portion of the settlement to which the lienholder asserts a right. A third party typically files a formal notice or a lawsuit to start proceedings.

Any third party or entity that paid any or all of the injured party’s bills is entitled to place a lien on the settlement.

Here are the most prominent examples of these entities:

• Healthcare providers
• Medicare and Medicaid
• Health insurance providers
• Personal injury lawsuit loan providers
• Automobile insurance providers
• The IRS and state tax agencies
• Child support agencies

Healthcare providers

Many injured parties have no health insurance or insufficient coverage to meet the medical bills in question. As a result, healthcare providers look to recover medical bills through settlement liens whenever possible.

If you have no health insurance, it might be possible to repay a partial lien. Your attorney will guide you through negotiating with the healthcare provider for partial repayment.

Medicare and Medicaid

Medicaid applicants must assign any monies from personal injury settlements pertaining to medical care to the state.

In personal injury cases where Medicaid paid the medical bills, the state is statutorily entitled to payment from the settlement by imposing a lien if necessary. Medicaid liens are only applicable to Medicaid payments associated with the injury.

Health insurance providers

Workers’ compensation, ERISA plans, and government employee insurance plans all have the right to assert medical liens on third-party settlements for personal injury.

Automobile insurance providers

When automobile insurance providers cover the cost of medical payments, they are sometimes entitled to reimbursement from settlements when the costs exceed $5,000.

State and Federal Tax Agencies

The IRS and state tax agencies can place liens on your claim if you have unpaid taxes and are not on a payment plan. These liens can be especially troublesome, as tax agencies are exempt from some laws that protect personal injury claim proceeds from creditors.

The Best Way to Protect Your Personal Injury Settlement

If you know creditors hold a judgment against you, do not deposit your settlement check into a regular bank account. Instead, consider depositing the check onto a prepaid debit card. Walmart offers an easily obtainable card ideal for this purpose.

Although you may pay a fee for a prepaid debit card, consider this the cost of protection. Prepaid debit cards are not tied to savings or checking accounts.

To protect yourself legally, deposit only funds from your personal injury settlement onto this card, and keep the paperwork.

Keep Your Funds Separate

If you are concerned about your personal injury settlement being garnished, keeping those funds separate is essential.

You should deposit your settlement check into a segregated account used solely for this purpose. Do not deposit any other funds into this account. This is known as commingling funds and results in the loss of your exemption.

Even if it seems like an extreme measure, avoid depositing even a dollar into this account unless you have documentation proving it came from the personal injury settlement. If you deposit a regular paycheck or funds from any other source, you will lose the protection usually afforded when funds have not been commingled.

Take these precautions, and your settlement is yours to keep, whether you are filing for bankruptcy or seeking protection from garnishment.

To safeguard your rights, you should always keep a paper trail of all payments made into the settlement account. Assuming the settlement takes the form of a single payment, this is straightforward.

If you do not have a segregated account for this purpose, you should open one or consider using a prepaid debit card, as mentioned above.

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