Can a Personal Injury Settlement be Garnished?
It's Your Money but Who Has Access to It?
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.
"Exempt" Awards Aren't Always Safe
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 lessor 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.
What You Can Do to Protect Your Injury Settlement from Being Garnished
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:
- Keep all settlement money completely separate from all other money you may have. That includes savings, wages, inheritances, etc. To do that you must create a completely separate bank account into which you only place that settlement money and nothing else.
- Keep accurate records of where that money came from and where it goes. You should keep all receipts, invoices, and bills (or a copy of them) that you paid with your settlement money. That lets you have easy access to the "paper trail" that's left behind in the aftermath of a personal injury settlement. By having that information available at a moment's notice, you can easily answer any questions that might arise days, weeks, or even years after you've received settlement payments.
- Use prepaid debit cards in an emergency. If a creditor holds a judgment against you, protecting that money becomes even more difficult. If it's sitting in a traditional bank account, the creditor may be able to get legal access to it. If you fear that will happen, depositing that money onto a prepaid debit card will let you hold onto it but still have easy access to it. These prepaid debit cards do come with several caveats though. They often have monthly fees associated with them. They often have limits concerning how much money you can put on the card. You may find places which will not accept them.
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Work Out a Payment Plan with Creditors to Protect Your Settlement
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 month is a lot better than having a creditor step in and legally take money straight form your bank account.
Plus, as long as you're living up to your end of the bargain and making those regular payments, the creditor or collections agency cannot pursue further action against you. That's important to know because it effectively keeps that money you were awarded in your personal injury settlement safe.
Dealing with the IRS
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 in 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 many times individuals are able to successfully negotiate with the IRS (either on their own or with the help of an experienced tax attorney) and 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.
Sooner is Better than Later
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:
- Decrease the total amount you actually owe
- Keep creditors off your back
- Protect any money you receive from a personal injury settlement
- Let you focus on recovery rather than debt collections
Know When You Need Legal Help
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.
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