How a Bankruptcy Filing Affects a Wrongful Death Lawsuit

TL;DR

When a defendant in a wrongful death lawsuit files for bankruptcy, an “automatic stay” is immediately imposed, which temporarily halts the lawsuit. This does not end your case. You must petition the bankruptcy court to “lift the stay,” which is often granted to allow you to proceed against the defendant’s insurance policy. The compensation you seek will likely come from the insurance coverage, not the defendant’s personal assets. You will also need to file a “proof of claim” in the bankruptcy case to register as a creditor and protect your right to any potential recovery from the bankruptcy estate itself.

Key Highlights

Automatic Stay: The bankruptcy filing triggers an automatic court order that pauses all collection efforts and legal actions, including your wrongful death lawsuit.
Relief from Stay: Your attorney must file a motion in bankruptcy court asking for permission to continue the lawsuit, typically for the sole purpose of collecting from an insurance policy.
Insurance Is Key: In most cases, the lawsuit can proceed against the defendant’s insurance company, as the policy proceeds are meant for the victim, not the creditors.
Proof of Claim: You must file a formal proof of claim with the bankruptcy court to establish your status as a creditor and preserve your right to recover funds from the defendant’s estate.

The loss of a loved one due to another’s negligence or misconduct is a profound tragedy, and the legal process that follows is often a critical step toward securing justice and financial stability for the surviving family members. Each year, thousands of wrongful death claims are filed in the United States, seeking to hold responsible parties accountable. These civil actions aim to recover damages for medical expenses, lost wages, loss of companionship, and other harms. The legal framework for these claims is well-established, providing a clear path for families to pursue compensation.

This established path, however, can be abruptly blocked when the defendant, whether an individual or a corporation, files for protection under the U.S. Bankruptcy Code. This action introduces a completely different set of federal laws and procedures into the state-level wrongful death case. The most immediate and significant effect is the imposition of an automatic stay under 11 U.S.C. § 362. This federal injunction instantly freezes the wrongful death lawsuit and any other efforts to collect a debt from the person or entity filing for bankruptcy, known as the “debtor.”

For families already coping with grief, learning that the defendant has filed for bankruptcy can feel like a devastating setback. It raises urgent questions about whether their pursuit of justice is over and if they will ever receive the compensation they deserve. Understanding the interplay between wrongful death litigation and bankruptcy law is essential. The process is complex, but it is not a dead end. Specific legal mechanisms exist that allow wrongful death claims to move forward, particularly when insurance coverage is available.

The Automatic Stay: The Immediate Impact on Your Lawsuit

When a person or company files for bankruptcy, one of the most powerful protections they receive is the automatic stay. This is a legal injunction that goes into effect the moment the bankruptcy petition is filed with the court. Its primary purpose is to give the debtor breathing room from creditors by stopping all collection activities, foreclosures, and lawsuits. Your wrongful death lawsuit falls directly into this category.

The stay is “automatic” because it requires no advance notice or separate court hearing to become effective. As soon as the bankruptcy is filed, the stay is active. This means your lawyer cannot file new motions, proceed with discovery, or take the case to trial. The state court where your lawsuit was filed loses its jurisdiction to proceed with the case until the bankruptcy court says otherwise. Any action taken in violation of the stay is legally void and can result in penalties against the person who violated it.

What Does the Automatic Stay Freeze?

The scope of the automatic stay is broad and is designed to preserve the debtor’s assets for an orderly distribution to all creditors. It halts:

Continuation of the Lawsuit: All proceedings in your wrongful death case must stop. This includes depositions, hearings, and trial dates.
Enforcement of Judgments: If you had already won a judgment but had not yet collected it, the stay prevents you from seizing assets, garnishing wages, or placing liens on property.
Communication: The stay generally prohibits attempts to collect the debt, which can limit direct communication regarding payment.

The stay applies to the debtor specifically. If your lawsuit involves multiple defendants and only one has filed for bankruptcy, the case against the other defendants can typically continue. However, the case against the bankrupt defendant is frozen in place. This legal pause is not permanent, but it requires you to take specific action within the bankruptcy court system to move forward.

Seeking Relief from the Automatic Stay

While the automatic stay halts your lawsuit, it is not an impenetrable wall. The U.S. Bankruptcy Code allows creditors, including wrongful death claimants, to file a “Motion for Relief from the Automatic Stay.” This is a formal request asking the bankruptcy judge for permission to continue the lawsuit in state court. The success of this motion often depends on the reason you want to continue the case.

The most common and compelling reason to lift the stay in a wrongful death case is the existence of an insurance policy. If the defendant has liability insurance, such as an auto or homeowner’s policy, your attorney can argue that the goal is not to take the debtor’s personal assets but to recover compensation from the insurance company.

The Legal Argument for Lifting the Stay

To grant relief from the stay, a bankruptcy judge typically needs to be convinced of one of two things:

For Cause: This is the most common argument in personal injury and wrongful death cases. “Cause” can include the fact that the lawsuit is the best way to determine the defendant’s liability and the value of the claim (a process called liquidation of the claim). More importantly, arguing that you only seek to recover from an insurance policy is a powerful “cause.” Since the insurance proceeds would be paid directly to you and not from the debtor’s estate, it does not harm other creditors.
Lack of Equity: This argument is more common in property disputes but can sometimes apply. It involves showing that the debtor has no equity in a particular property and that the property is not necessary for an effective reorganization.

In the context of a wrongful death claim, the “for cause” argument is your primary tool. The motion filed by your attorney will clearly state that the purpose of continuing the lawsuit is to:

Establish Liability: Prove in state court that the defendant was legally responsible for your loved one’s death.
Liquidate the Claim: Have a jury or judge determine the monetary value of your damages.
Recover from Insurance: Collect the determined amount exclusively from the defendant’s insurance provider, up to the policy limits.

Bankruptcy judges frequently grant these motions because allowing the case to proceed against an insurer serves the interests of justice without disrupting the bankruptcy process. The court will typically issue an order modifying the stay to permit the lawsuit to continue, but with the strict limitation that any resulting judgment can only be enforced against the insurance policy.

Chapter 7 vs. Chapter 13 Bankruptcy: How the Defendant’s Choice Matters

Individuals typically file for bankruptcy under either Chapter 7 or Chapter 13 of the Bankruptcy Code. The type of bankruptcy the defendant chooses has significant implications for your wrongful death claim and your potential for recovery beyond insurance.

Chapter 7 Bankruptcy: Liquidation

Chapter 7 is often called “liquidation” bankruptcy. In this process, a court-appointed trustee gathers and sells the debtor’s non-exempt assets to pay off creditors. Once the assets are distributed, most of the debtor’s remaining debts are discharged, meaning they are legally forgiven.

Impact on Your Claim: Your wrongful death claim is treated as an “unsecured debt.” If there are any assets to distribute after secured creditors (like mortgage lenders) are paid, you would receive a pro-rata share along with other unsecured creditors (like credit card companies). In many Chapter 7 cases, there are few or no assets available for unsecured creditors.
The Discharge Injunction: The primary goal of Chapter 7 for the debtor is the discharge. Once granted, it permanently prohibits creditors from trying to collect on the discharged debts. This means if your claim is discharged, you cannot pursue the defendant’s personal assets in the future.
Exception to Discharge: There is a critical exception. Under Section 523(a)(6) of the Bankruptcy Code, a debt for “willful and malicious injury” by the debtor to another entity or to the property of another entity is not dischargeable. If the wrongful death was caused by an intentional act or something like a DUI, your attorney could file a separate action in the bankruptcy court (an “adversary proceeding”) to have your claim declared non-dischargeable. If successful, you could pursue the defendant’s personal assets even after the bankruptcy is over.

Chapter 13 Bankruptcy: Reorganization

Chapter 13 is a “reorganization” bankruptcy for individuals with a regular income. Instead of liquidating assets, the debtor proposes a repayment plan to pay back some or all of their debts over a three-to-five-year period.

Impact on Your Claim: Your wrongful death claim would be included in the repayment plan. The amount you receive depends on the debtor’s income, expenses, and the total amount of debt. As an unsecured creditor, you would receive payments over the life of the plan. Often, this results in receiving only a fraction of the total claim value from the debtor’s own funds.
Continuing the Lawsuit: As with Chapter 7, you would still file a motion for relief from the stay to proceed against the defendant’s insurance policy. This remains your primary path to a more complete financial recovery.
Discharge in Chapter 13: At the end of a successful repayment plan, the debtor receives a discharge of any remaining eligible debts. Chapter 13 has a broader discharge than Chapter 7. However, the “willful and malicious injury” exception can still apply, though the rules are slightly different. Proving your claim falls under this exception is crucial if you hope to recover more than what the repayment plan and insurance provide.

In either scenario, the presence of insurance is the most important factor. The bankruptcy type primarily affects your ability to recover money directly from the defendant if insurance is insufficient or non-existent.

The Role of Insurance in a Wrongful Death Claim During Bankruptcy

The single most critical element that can preserve a wrongful death lawsuit after a bankruptcy filing is the defendant’s liability insurance. Most people mistakenly believe that because the defendant is bankrupt, there is no money to recover. In reality, the lawsuit is often not about the defendant’s wallet but about their insurance company’s contractual obligation.

An insurance policy is a contract where the insurer agrees to defend the policyholder against claims and pay for damages they are found legally liable for, up to the policy limits. When a defendant files for bankruptcy, the insurance policy is technically an asset of the bankruptcy estate. However, the proceeds of that policy are not intended for the debtor or their general creditors. They are designated for the benefit of the person who was harmed, in this case, the family of the deceased.

Why You Can Still Pursue the Insurance Company

Courts have consistently held that allowing a lawsuit to proceed against a bankrupt defendant for the purpose of recovering from their insurer is fair and just. Here is the reasoning:

No Harm to the Estate: Since the insurance company, not the debtor, will be paying the judgment, it does not diminish the assets available for other creditors in the bankruptcy case. The debtor’s “fresh start” is not compromised.
Contractual Obligation: The insurance company has a pre-existing contractual duty to defend the insured and pay for covered claims. The bankruptcy filing does not erase this duty.
Liquidation of the Claim: The state court trial is the proper venue to determine fault and calculate the full extent of damages. The bankruptcy court is not equipped to handle a complex wrongful death trial.

Your attorney will file the motion for relief from the stay, making it clear to the bankruptcy judge that the sole purpose is to access the insurance coverage. The court order lifting the stay will be specifically tailored to this purpose. It will allow you to continue the lawsuit and obtain a judgment, but it will prohibit you from collecting that judgment from the debtor’s personal property, income, or other assets protected by the bankruptcy. This arrangement balances your right to be compensated with the debtor’s right to bankruptcy protection.

Filing a Proof of Claim in Bankruptcy Court

Even if you are confident that an insurance policy will cover your damages, you must still participate in the bankruptcy process to protect all of your rights. This involves filing a document called a “Proof of Claim.”

A proof of claim is a formal notice filed with the bankruptcy court that states you are a creditor and the debtor owes you money. Filing this document is essential for several reasons:

Preserves Your Rights: It officially registers your claim with the court. If you fail to file a proof of claim by the deadline (the “bar date”), you may forfeit your right to receive any distribution from the bankruptcy estate.
Establishes Your Status: It positions you to receive a share of any assets the bankruptcy trustee liquidates and distributes to unsecured creditors. While this may be a small amount, it is better than nothing.
Covers Any Shortfall: If the wrongful death judgment exceeds the insurance policy limits, the portion not covered by insurance becomes an unsecured claim against the debtor. Your proof of claim ensures this “gap” amount is included in the bankruptcy. For example, if your judgment is for $1.5 million and the insurance policy limit is $1 million, you have a $500,000 unsecured claim in the bankruptcy.

How to File a Proof of Claim

The proof of claim form (Official Form 410) requires specific information:

Debtor’s Information: The name of the person or company who filed for bankruptcy and the case number.
Creditor’s Information: Your name and contact information.
Amount of the Claim: This can be challenging in a wrongful death case. At the time of filing, your claim is “unliquidated” because the exact dollar amount has not been determined by a court. You will state the amount as “unliquidated,” “unknown,” or provide a good-faith estimate of the damages.
Basis for the Claim: You will describe the claim as arising from a wrongful death action, specifying the date of the incident.
Supporting Documentation: You should attach any relevant documents, such as a copy of the lawsuit complaint.

Filing a proof of claim is a procedural but vital step. An experienced arizona wrongful death attorney can ensure it is completed accurately and submitted before the court’s deadline, safeguarding your position as a creditor while you simultaneously work to lift the stay and pursue the insurance proceeds.

Corporate Bankruptcy (Chapter 11) and Its Effect on Wrongful Death Claims

When the defendant is a corporation rather than an individual, the bankruptcy is often filed under Chapter 11. This is a reorganization bankruptcy designed to allow a business to continue operating while it restructures its debts and pays creditors over time. Chapter 11 cases can be far more complex, especially when they involve numerous wrongful death or personal injury claims, known as “mass torts.”

Think of cases involving defective products, pharmaceutical drugs, or major industrial accidents. In these situations, a company might face hundreds or thousands of similar lawsuits. Filing for Chapter 11 allows the company to manage all these claims in one forum: the bankruptcy court.

Key Features of Chapter 11 in Wrongful Death Cases

The Automatic Stay: Just like in personal bankruptcies, the automatic stay halts all lawsuits against the company.
Creditors’ Committees: In large Chapter 11 cases, the court may appoint an Official Committee of Unsecured Creditors to represent the interests of all creditors, including tort claimants. Your claim would be part of the group represented by this committee.
Claims Estimation and Resolution: Instead of each lawsuit proceeding to trial separately, the bankruptcy court will often implement a process to estimate the company’s total liability for all wrongful death and injury claims. This might involve using historical settlement data, expert analysis, or bellwether trials (a small number of representative cases tried to help value the rest).
Reorganization Plan: The company will propose a Plan of Reorganization that details how it will pay its creditors. For tort claimants, this often involves establishing a trust. The company funds the trust with a combination of cash, stock, and future profits. A court-appointed trustee then evaluates each claim and distributes payments from the trust according to a set of criteria.

Your ability to recover compensation is tied to the success of the company’s reorganization and the terms of the plan. While you still need to file a proof of claim, the process is less about pursuing a single insurance policy and more about participating in a large-scale, court-supervised claims resolution process. This requires legal counsel skilled in both bankruptcy law and mass tort litigation to ensure your claim is valued fairly and you receive the maximum possible distribution from the reorganization plan or settlement trust.

Conclusion

The discovery that a defendant in a wrongful death case has filed for bankruptcy adds a significant layer of legal complexity to an already difficult situation. The automatic stay immediately pauses the lawsuit, creating uncertainty and concern. However, a bankruptcy filing is rarely the end of the road for your claim. It is a detour that requires a different legal strategy, one that operates within the framework of federal bankruptcy law.

The central pillar of this strategy is often the defendant’s liability insurance. By successfully petitioning the bankruptcy court for relief from the stay, your case can proceed against the insurer, allowing you to establish liability and recover damages without touching the debtor’s protected assets. This process ensures that the insurance company fulfills its contractual obligation to compensate you for your loss. Concurrently, filing a proof of claim is a critical step to preserve your right to any funds that may become available from the bankruptcy estate itself, covering potential shortfalls in insurance coverage.

Whether the defendant is an individual filing under Chapter 7 or 13, or a corporation reorganizing under Chapter 11, the path forward requires precise legal action. Each type of bankruptcy presents unique challenges and opportunities. The key is to act swiftly and decisively.

If you are facing this situation, it is imperative to secure legal representation from a firm with experience in both personal injury law and bankruptcy procedures. An attorney who understands how these two fields intersect can protect your rights in both state and federal court, ensuring every available avenue for compensation is pursued. Do not assume your case is over. Contact a qualified wrongful death attorney to discuss the specific facts of your case and build a strategy to continue your fight for justice. Contact us for free evaluation today.