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Is a legal settlement exempt from bankruptcy? If I have not filed for bankruptcy and receive a legal settlement later?

Stamford, CT |

If I recieve a legal settlement and later declare bankruptcy, and those funds have been already spent, what will the trustee attempt to do?

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Attorney answers 2


Let me answer your question with a question: Do you think that I could put money in my pocket and hold it (i.e. a possible settlement) and NOT tell the bankruptcy trustee that I might have that money available to me? Would that be honest? Probably not. And, it would probably violate the law.

The case (or "action") is almost always treated as a potential asset and as available to the bankruptcy estate. You really should consult with a knowledgeable bankruptcy attorney BEFORE you go much further with respect to your future settlment or bankruptcy (at least speak to your current attorney about it.)


If you obtained funds from a legal settlement and spent them prior to filing bankruptcy, the trustee may rightfully want to know what you did with the money, and require documents proving what you . If you preferred a family member or friend by paying that person back within a year of the bankruptcy filing the bankruptcy trustee may seek to avoid the preferential transfer. If you paid back any creditor within the 90 days prior to filing bky the same thing might happen.
Further, to the extent that you still have funds in your possession from a "legal settlement" depending on the character of the cause of action from which it arose, it might be exempt. For example, personal injury settlements have limited exemptions, workers comp settlements have greater exemptions, child support and property division in marital dissolution are often fully exempt, so it's not possible to answer your question fully without more information.
If you're thinking of filing bankruptcy and have this type of assets to protect, you would be well advised to engage an experienced attorney to represent you. Kenneth Lenz, Esq., Board-Certified in Consumer Bankruptcy Law website:

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