If you are considering bringing a personal injury claim, have already received a personal injury settlement or are about to, one of the most important things you can do is protect that money so it's there when you need it. One common question we get asked as personal injury attorneys in California is "can a personal injury settlement be garnished?"
While the short answer to that question is "no," there are certain steps you need to take in order to earn that level of protection for the monetary settlement you've been awarded.
Money awarded in personal injury settlements in California is technically "exempt" under the law. That means that creditors cannot legally garnish that money (take it from your bank accounts). However, if you accidentally mismanage that money, that exempt status could be put in jeopardy, leaving you on the hook for whatever you may owe.
In general, California law allows creditors to garnish the lesser of 25% of your disposable income (what's left over after you subtract the cost of living associated with rent, groceries, etc.) or the amount by which that exceeds 40 times the state's hourly minimum wage.
When creditors file suit against you, a court may order you to pay. If you have funds stashed away from a prior personal injury settlement, you are currently in the personal injury process or you plan on making a personal injury claim, you may wonder "Can a personal injury settlement be garnished?" Well, that depends on how you hold your injury settlement money.
If the creditor discovers that you have money in a traditional bank account, the court may authorize the creditor to garnish that account. If you place money received from a personal injury settlement into that account, that money may be garnished as well, because differentiating between that money and the rest of it (your paycheck, for example) can become difficult.
In cases like this, your settlement money essentially gets taken by mistake. If that does happen, getting it back can be next to impossible without an ironclad paper trail showing exactly where every cent in those accounts came from.
You don't want to go through the whole personal injury settlement process only to have that money disappear when a creditor gains access to your bank accounts. In order to protect those assets you need to:
If you enter into a financial agreement with a lender, they may issue a lien against your financial holdings in order to secure their investment. Such liens are legally binding documents that essentially force you to pay the creditor at some point in the future (usually after you've received your personal injury settlement). Failure to pay liens could result in that creditor pursuing more aggressive collections actions against you—up to and including court cases.
However, liens can be fluid documents as well. They designed to be a guarantee that your creditor will get their money back at some point in the future. A good personal injury attorney can work with any creditors that hold liens against you in order to mitigate that expense:
And, if you enlist professional legal help from the very beginning, your lawyer may be able to convince your creditors not to file a lien in the first place.
Keep in mind, that once a lien is filed, you are essentially "on the hook" for the entire amount. It's often nearly impossible to get a creditor to completely forgive a debt once they've taken that step.
The easiest way to protect money you were awarded in a personal injury settlement from creditors in California is to simply pay off your debt.
Unfortunately, that's not always as easy as it sounds. You may not have easy access to that kind of money, and other necessities (like rent, groceries, and car payments) may take precedence. However, if you open a dialog with creditors, most will work with you to create a payment plan which you can afford.
While such a payment plan may put a pinch on your finances for years to come, paying a little every week or every month is a lot better than having a creditor step in and legally take money straight from your bank account.
One important note about payment plans, once they're agreed upon by all parties involved, as long as you are living up to your end of the bargain (by making those regular payments) the creditor or collections agency cannot pursue further action against you. That means no case escalation, no legal action, no aggressive tactics. That's important to know because it effectively keeps the money you were awarded in your personal injury settlement safe.
There are several exceptions to these guidelines, and the biggest frustration that most people run into is that government agencies (like the IRS and state agencies) are not subject to the same legal requirements as regular creditors. Often there is no deadline by which they must file a claim against the debt you owe, and they have access to a much more aggressive reclamation process.
For example, the IRS can garnish any of your bank accounts (with authorization) and all of the money in that account is subject to the garnishment—regardless of where it came from.
In addition, the IRS is not subject to the garnishment limitations most other creditors are. That means they can take more of your money at one time.
But it's not all bad news. The IRS (just like any other creditor) would rather get some of the money they're owed rather than none, and often individuals are able to successfully negotiate with the IRS (either on their own or with the help of an experienced tax attorney) to decrease the total amount they owe or create less-aggressive payments plans. Both methods leave more money in their bank accounts at the end of each month.
Most major creditors (including hospitals) generally do not have in-house collections agents. They outsource the collection of your debt because it makes financial sense for them. They pay these agencies a fraction of what they would one of their own employees to go after you and attempt to get the money you owe.
However, there are very strict state and national regulations as to how those agencies can and cannot operate in order to collect a debt. Many of these regulations are actually codified in law. The Fair Debt Collection Practices Act (FDCPA) is an overarching federal law that lays out unacceptable practices.
A few of the important restrictions placed on debt collectors by this act include:
If the agency breaks those laws, not only could they be facing fines, you could potentially have the basis for a lawsuit against them.
Keep accurate records of all transactions and communication you have with that agency. It's tempting to toss those letters in the trash and delete those voicemails but don't give in. Those communications can be used as evidence of illegal activity that you could use to help you safeguard your personal injury settlement from creditors.
But dealing with debt collectors isn't a one-way street. If you are not currently being represented by a legal professional, there is one more thing you should know. Debt collectors are legally required to give you certain information as well.
This necessary information includes:
If the creditor does not immediately furnish you with this information when asked, they are legally required to do in writing within 5 business days of your request.
As with most things in life, dealing with your debt before a creditor tries to garnish your personal injury settlement is the best way to go. Not only will paying off your debt sooner cost you less in the long run, being proactive about your financial responsibilities will often cause creditors to "go easy" on you and not break out their full arsenal of legal tactics to get the money they are owed.
One thing you can do, if you're injured in an accident, is to plan ahead before actually receiving your settlement. With the help of a personal injury attorney in California who has experience dealing with outstanding debts, you can create a plan that may:
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Check out our How it Works Page to learn more about how the personal injury process works.
It's not always easy winning (or holding on to) a personal injury settlement in California. There are a large number of factors that determine the size of the award, how quickly you receive it, and whether or not creditors (like the IRS) can garnish your personal injury settlement. Sometimes you need a little professional help to keep yourself (and your family) financially stable after an accident or injury.
When you have question about what happens next or need the best advice possible, contacting an experienced personal injury attorney in California is truly your best option. You can get the legal advice you need to help protect your financial assets even if you owe the IRS, medical service providers, or other creditors.