Bankruptcy As An Irrelevancy

With these economic times resulting in many personal and corporate bankruptcies, an obvious question arises: “What happens to the personal injury claimant who is suing a bankrupt defendant?” If the defendant has liability insurance, you can rest easily. Of course, that assumes that the liability insurance is enough to pay all claimants. But in the usual circumstance, liability insurance will be enough.

When Plaintiff A sues Defendant B the caption of the case reads “A v. B.” What almost always occurs is that B is indemnified by a liability insurance policy. That insurer controls the litigation and selects the defense counsel. A bankruptcy filing of Defendant B will “stay” all proceedings. However, a motion to the Bankruptcy Court where the bankruptcy has been filed will relieve the “stay” to the extent of the liability insurance coverage. I would call this a pro forma matter.

The consequence of the above is that a bankruptcy filing in most circumstances has no practical effect on the personal injury plaintiff. The claim, once the stay is removed, continues to be defended by the insurance counsel and ultimately paid by the insurance company.