Please be advised that the following topic is for informational purposes only and not a legal matter currently handled by our firm. If you need further assistance regarding this particular topic, you can contact your local Bar Association for a referral to an attorney who may be able to address your inquiry in more detail.
When you’re receiving a settlement from a personal injury claim, it’s important to protect that money. You might be wondering, “Can anyone take my settlement away?”
This brings up the topic of garnishment, which means taking money from someone’s paycheck or bank account to cover past judgments. It’s scary to think about receiving a settlement award, only to have a creditor take it right out of your bank account!
So let’s look at whether personal injury settlements can be garnished in California. We’ll also share some steps you can take to protect your settlement.
California’s Exemption for Personal Injury Settlements
Money awarded in personal injury settlements in California is exempt under the law from garnishment under the law protecting it from creditors seizing it. That means creditors can’t legally take settlement money from your bank account and use it to pay off your old debts.
However, that’s not the whole story. If you don’t protect your settlement money, its exempt status could be in jeopardy and you risk losing it to a creditor.
Here’s why. California law allows creditors to garnish either 25% of your disposable income or the amount by which that exceeds 40 times the state’s hourly minimum wage, whichever is lesser. Your disposable income is whatever money you have after subtracting the cost of your rent, groceries, and other basic living needs.
That’s a bit confusing, but essentially what it means is that a portion of your income is subject to garnishment. So if you deposit your personal injury settlement check like it’s your paycheck, it’s all mixed together and available for creditors to drain it out of your bank account.
If a creditor files suit against you, a court may order you to pay the creditor out of your bank account where your settlement funds are stashed. This is something to keep in mind if you are currently in the personal injury process or you plan on making a personal injury claim soon. Plan carefully before you receive a settlement!
Protecting Your Settlement Funds From Garnishment
If a creditor discovers that you have money sitting in a traditional bank account, they may convince a court to authorize them to take it. Although California law technically forbids this, it’s hard for the courts to distinguish between all money in your account and settlement money in your account, so creditors sometimes get away with it.
When your money has already been taken, even if it’s by mistake, it’s very difficult to get it back. You’ll have to provide the court with an ironclad paper trail showing where every penny of your money went, which can be frustrating and time-consuming.
So instead, prevent your injury settlement from ever being garnished in the first place. To protect those assets, here are some things you can do.
- Separate Your Settlement: Keep all settlement money separate from other funds. This means you must deposit it in a completely different account from your savings, paycheck, an inheritance, or any other money you have. Set up a separate bank account where you keep settlement money and nothing else.
- Save All the Paperwork: Maintain accurate records of where your settlement money came from and exactly where it goes. Keep all receipts, invoices, and bills that you paid with your settlement money. This creates a paper trail for your personal injury settlement. If it’s ever in dispute, even months or years later, you can easily provide proof to protect yourself.
- Use a Prepaid Debit Card for Spending: Need to spend some settlement money in an emergency? Use a prepaid debit card. This keeps it out of a traditional bank account where a creditor can access it, but still gives you an easy way to use the money. Of course, prepaid debit cards sometimes have balance limits and monthly fees, and some places don’t accept them, so read the fine print before using one.
How Garnishments Work With Liens
Are you managing your liens wisely? If you enter into a financial agreement with a lender, they may issue a lien against your financial holdings to secure their investment.
Liens are legally binding documents that essentially force you to pay the creditor at some point in the future. If you fail to pay, you may face a court battle. Liens sometimes go along with personal injury awards and guarantee a company – like a doctor’s office – payment after your settlement is final.
However, liens can be fluid documents and aren’t always as firm as they seem. A lien is designed to be a guarantee that your creditor will get their money back at some point in the future. It doesn’t necessarily have to be now.
A good personal injury attorney can work with any creditors that hold liens against you to work out something agreeable to both you and the creditor. Here are a few examples.
- Payment can be deferred for a concrete period.
- A payment plan prevents you from owing the full debt all at once.
- Payment amounts can be adjusted to fit your financial situation.
Even better, when 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 after a lien is filed, you are 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.
What Information Are You Entitled To?
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:
- The name and contact info of the current creditor
- The total amount that you owe
- The name and contact address of the original creditor (if the debt was sold)
- A declaration that you are legally allowed to dispute this debt
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.
Why a Payment Plan Protects Your Settlement
The easiest way to protect settlement money is to simply pay off your debt. Of course, that’s not as easy as it sounds!
Your household’s bills, groceries, and other needs come first. You don’t necessarily have extra money lying around to pay off your old debts and make your creditors happy. But if you can open a dialogue with them, you might be able to work something out that minimizes the impact of your debt.
A payment plan can be an affordable way to get rid of debt and prevent your creditors from coming after your California personal injury settlement. Paying a very small amount each week keeps them off your back while you live your life as usual.
Here’s something important to keep in mind about payment plans: The moment you and the creditor agree on a payment plan, they have to stop taking further action against you. That means no case escalation, no legal action, no aggressive tactics. Your payment plan keeps the money you were awarded in your personal injury settlement safe.
How to Deal With the IRS
One of the biggest frustrations people face after receiving personal injury settlements is having their money snatched away by the government. The IRS and state agencies don’t have to follow the same rules as regular creditors, so they can pursue aggressive reclamation policies and take your money.
For example, the IRS can take money from your bank accounts regardless of the source of the money. Your personal injury settlement is fair game for them. The IRS can also seize more money at a time than a creditor is usually allowed to take.
But it’s not all bad news. We still have some effective tips for dealing with the IRS after you receive a personal injury settlement.
- Negotiate with the IRS with the help of an experienced tax attorney.
- Arrange to decrease the total amount you owe if you pay it all off by a certain date.
- Create a less aggressive payment plan that gives you more breathing room each month.
- Offer the IRS a partial payment that stops them from seizing your personal injury settlement.
Remember: The IRS may accept a lower offer as a total resolution to your case, rather than continue wasting their resources pursuing you for the full amount. But don’t make an offer or sign anything until you consult with an attorney.
Interacting With Collections Agencies
Most major creditors, including hospitals, don’t have in-house collections departments. They outsource the collection of your debt because it makes financial sense for them. They pay these agencies pennies on the dollar 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 operate as they collect debts. Many of these regulations are codified in law.
The Fair Debt Collection Practices Act (FDCPA) is an overarching federal law that lays out unacceptable practices. Here are a few highlights from the FDCPA.
- Creditors can’t contact you at “unusual times” or at “inconvenient places,” meaning they can’t call you in the middle of the night or while you’re in the hospital.
- They can’t tell your employer about your debts or pursue you relentlessly while you’re working.
- They can’t harass you or anyone else about your debt using aggressive tones or threats.
- They can’t misrepresent who they are or what amount they’re collecting.
- If you’re represented by an attorney and that is made known to the collector, they cannot contact you directly. All contact must be made through your legal representation.
With all of this in mind, it’s important to note that debt collectors have the right to do their jobs legally. Also, they don’t have to stop contacting you using legal means just because you tell them to stop.
Don’t Delete Those Voicemails!
Keep accurate records of all transactions and communications you have with collection agencies that contact you. It’s tempting to toss those letters in the trash and delete all the voicemails, but don’t give in.
Written and voice communications can be used as evidence of illegal activity. When creditors and collection agencies break the law, they can be fined severely – and in some cases, victims can receive monetary awards.
You should know that all debt collectors are legally required to give you certain information as they try to get you to pay. This necessary information includes:
- The name and contact info of the current creditor
- The total amount that you owe
- The name and contact address of the original creditor, if the debt was sold
- A declaration that you are legally allowed to dispute this debt
When a debt collector refuses to provide the information above, they’re breaking the law. If they don’t immediately furnish you with this information when asked, they are legally required to do so in writing within five business days of your request.
Act Fast When You Need Legal Help
As you can see, protecting your personal injury settlement from debt collectors can be challenging. But with some planning and good legal assistance, you can keep your money out of other people’s hands.
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 owe, maximizing the amount you keep from your personal injury settlement.
- Keep creditors off your back.
- Protect any money you receive from a personal injury settlement.
- Let you focus on recovery rather than debt collections.
It’s not always easy to preserve the value of a personal injury settlement in California. There are so many factors that determine the size of the award, how quickly you receive it, and whether creditors and 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. Don’t wait until your settlement money is already gone to ask for help.
Contact Sally Morin Personal Injury Lawyer for a free consult to talk about how to protect your financial assets as you arrange a personal injury settlement. If you or someone you love has suffered major injuries in a bicycle, motorcycle, pedestrian vs. auto, car, Uber, or Lyft accident, get a free, no-risk evaluation of your case online now.
We care about helping you get the most out of your money. Our law office will help keep your settlement money in your pocket where it belongs!
