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Bankruptcy and car accident judgments: what a discharge can erase
Most ordinary crash judgments can be discharged in bankruptcy; injury caused by intoxicated driving cannot. What survives, the license, and how victims collect.
A judgment against a driver for an ordinary negligent crash is generally the kind of debt a bankruptcy discharge wipes out. A judgment for death or personal injury caused by driving while unlawfully intoxicated is not: federal law lists it among the debts that survive. Injuries caused on purpose, or willfully and maliciously, can also survive, though the injured person has to ask the court to rule that way. So the answer to "would bankruptcy erase it?" depends on why the crash happened, which chapter of the Bankruptcy Code the driver uses, and what the injured person does in time.
This article explains the rules from both sides: what the driver faces, including the effect on a suspended license, and how an injured person can still collect. Bankruptcy is a technical field, and a licensed bankruptcy attorney (for a driver) or a personal injury attorney (for a victim) is the right source for a specific case.
The starting point: a judgment is a debt
A court judgment for damages after a crash is a debt the driver owes the injured person. If the driver had liability insurance, the insurer pays up to the policy limit and the driver owes the rest; if the driver had no insurance, the driver owes all of it. That is when bankruptcy comes up. (Collection mechanics are in Can they take your savings? How accident judgments are collected.)
A bankruptcy discharge, in the words of the federal courts' Chapter 7 page, releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking collection action against the debtor. The key word is "most." The U.S. Courts' page on discharge lists the categories that are not discharged, and two of them matter here: debts for willful and malicious injuries to person or property, and debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated.
Ordinary negligence: usually dischargeable
Negligence means carelessness: running a stop sign, following too closely, looking at a phone. Most crashes are negligence cases. A judgment based on negligence has no special protection in the Bankruptcy Code, so a Chapter 7 or Chapter 13 discharge ordinarily eliminates the debtor's personal liability for it, along with credit card debt and medical bills.
Some details matter for both sides:
- The debt has to be listed. The federal courts' page includes, among the types of debts that are not discharged, debts the debtor did not set forth on the lists and schedules filed with the court. A driver who leaves an injured person off the list does not get a clean slate for that debt. An injured person who learns of a filing should check that the claim was listed and that notice was received.
- A pending lawsuit stops. Filing a Chapter 7 petition triggers an automatic stay that halts most collection actions against the debtor, under 11 U.S.C. section 362. That includes continuing a lawsuit against the driver in the ordinary way. How an injured person can still reach the driver's liability insurance is covered below.
- The discharge protects the person, not the insurance. Bankruptcy eliminates what the driver personally owes. It does not cancel the liability policy, and it does not change what the policy owes on a covered claim.
Driving while intoxicated: not dischargeable
Congress carved out the crashes caused by drunk and drugged driving. Section 523(a)(9) of Title 11, in the text at Cornell's Legal Information Institute, excepts from discharge any debt "for death or personal injury caused by the debtor's operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance."
Points to note about that wording:
- It covers death and personal injury. The text does not mention property damage, so a claim for a wrecked car stands on different footing. Ask a bankruptcy attorney how a mixed judgment is treated in your court.
- It requires that the operation was unlawful because the driver was intoxicated. A judgment from a civil case that rests on negligence alone does not automatically prove that. The facts that show intoxication, such as a conviction or a blood-alcohol finding, usually matter; the evidence a court will accept in a given district is a question for counsel.
- It applies by operation of law. The U.S. Courts' page notes that most exceptions apply automatically when the language of section 523(a) applies. The exceptions for fraud, certain fiduciary wrongs and willful and malicious injury (paragraphs (2), (4) and (6)) are different: the creditor must ask the court to find the debt nondischargeable.
For an injured person, this is the exception that matters most in practice. A driver who is convicted of drunk driving after causing a serious injury cannot use a Chapter 7 or Chapter 13 discharge to erase the injury judgment. The debt remains, and the injured person can keep trying to collect it. For the insurance side of a drunk driving crash, including how punitive damages and policy exclusions play in, see does car insurance pay when the at-fault driver was drunk? and punitive damages in car crashes: drunk driving and insurance.
Willful and malicious injury
Section 523(a)(6) excepts a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." Courts apply it to intentional harm, such as using a car as a weapon, and not to carelessness, though how a court draws that line is fact-specific. Because paragraph (6) is one of the exceptions that does not apply on its own, the injured person must file a complaint in the bankruptcy case asking the court to declare the debt nondischargeable, within the time the bankruptcy rules allow. The U.S. Courts' Chapter 13 page describes the deadline rule as requiring a creditor to "timely" file and prevail. A victim who has missed a deadline cannot cure it later, so involve an attorney before the deadline arrives; the exact number of days is in the bankruptcy rules, which I have not quoted here.
Chapter 7 versus Chapter 13
The two chapters most individual drivers use treat judgments differently.
| Chapter 7 | Chapter 13 | |
|---|---|---|
| What it is | "Liquidation": nonexempt property is sold and proceeds go to creditors | A repayment plan, usually three to five years, out of income |
| What happens to the judgment | Dischargeable if ordinary negligence; typically ends after the discharge order | Paid in part through the plan, as an unsecured claim, and discharged on completion |
| Intoxicated driving injury (523(a)(9)) | Survives | Survives, because Chapter 13's discharge also excepts 523(a)(9) debts |
| Willful and malicious injury to a person | Survives if creditor wins an adversary case | Survives, because Chapter 13 excepts damages from willful or malicious injury that caused personal injury or death |
| Timing of discharge | Generally 60 to 90 days after the date first set for the meeting of creditors | After the plan payments are completed |
| What the debtor keeps | Exempt property | Property is generally kept while the plan is paid |
The Chapter 7 timing comes from the same Chapter 7 page. The Chapter 13 page describes plans of three to five years and notes that the Chapter 13 discharge is somewhat broader than in Chapter 7. For vehicle injuries, the practical point is that the intoxicated driving exception follows the debtor into Chapter 13 as well. Section 1328(a) of Title 11 says the Chapter 13 discharge does not cover debts "of the kind specified in" paragraph (9) of section 523(a), or restitution or damages awarded in a civil action against the debtor "as a result of willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual."
What the driver keeps: exempt property
In Chapter 7 the trustee can sell nonexempt property to pay creditors. The federal courts' page explains that a debtor may protect some property because it is exempt under federal bankruptcy law or under the law of the debtor's home state, that many states have adopted their own exemption laws in place of the federal list, and that whether certain property is exempt "is often a question of state law." So the answer to "what could be taken?" varies by state and by what the driver owns.
If a driver has few nonexempt assets, a judgment may be worth little in a Chapter 7 case, which is why injured people look to insurance first. See the judgment-proof myth: what cheap limits expose after a crash and protecting retirement savings from an auto liability judgment.
For a debt that survives bankruptcy, such as an intoxicated driving injury judgment, the usual state-law collection tools remain available, subject to the state's exemptions. These can include wage garnishment and liens, within the limits of state law.
Driver's license and financial responsibility laws
Many states have financial responsibility laws that threaten a driver's license or registration after an unpaid crash judgment. The Eleventh Circuit described one such Florida provision in 2008, section 324.121, which suspends a license or registration upon notice of an unsatisfied judgment. Does a discharge lift such a suspension?
For ordinary debts, the Supreme Court said the state cannot hold the license hostage. In Perez v. Campbell, 402 U.S. 637 (1971), the Court considered an Arizona statute under which a driver's license was suspended for an unpaid auto accident judgment even after the debtor received a bankruptcy discharge of the same judgment. The Court held that the provision conflicted with the federal bankruptcy law and, under the Supremacy Clause, "may not stand." The opinion is available here. The Bankruptcy Code now has a related rule in section 525(a): a governmental unit may not deny, revoke, suspend or refuse to renew a license, permit or similar grant to a person that is or has been a debtor "solely because" the debtor "has not paid a debt that is dischargeable" in the bankruptcy case or that was discharged. You can read the text of section 525.
Three cautions:
- Perez was about a debt that bankruptcy discharges. A debt that survives, such as an intoxicated driving injury, is not discharged, and the reasoning does not clearly extend to it. States may continue to apply their own suspension rules for such a debt; ask the motor vehicle agency or a lawyer.
- Other license consequences are separate. A DUI conviction, unpaid fines, and a requirement to file proof of future insurance (the SR-22 form) come from different laws. Bankruptcy of a civil judgment does not wipe those out. See SR-22 insurance explained.
- State rules differ. Your state's financial responsibility law and the motor vehicle agency's current process control what you must do to get a license back. Use the state car insurance requirements lookup and the agency's own site.
How an injured person collects
A bankruptcy filing does not have to end the injured person's chances. The options depend on whether the driver had insurance.
If the driver had liability insurance
- The insurer's duty to pay a covered claim up to the policy limit comes from the contract, not from the driver's solvency. Bankruptcy discharges what the driver personally owes; it does not make the policy disappear.
- Because the automatic stay stops ordinary collection against the debtor, injured people commonly ask the bankruptcy court for permission to continue the case to the extent insurance applies. Whether and how a court allows that is a matter for the attorneys and the judge.
- If the insurer unreasonably refused a chance to settle within limits, the driver may have rights against the insurer for the excess judgment. See refused settlements and excess judgments: the insurer's duty to settle and excess judgments: when a verdict is larger than your policy limit. Those rights vary by state, and they may matter in a bankruptcy case.
If the driver had no insurance
- Your own uninsured motorist coverage. If you carry it, it can pay for injuries caused by an uninsured driver without a court judgment against the driver. The claim is against your own insurer under your policy. See uninsured and underinsured motorist coverage explained and uninsured motorist claims: consent to settle, arbitration and proof.
- Underinsured motorist coverage. If the driver had insurance but not enough, your underinsured coverage may pay the difference, subject to your state's rules. See underinsured motorist claims: offset vs excess and consent to settle.
- State funds. Some states have assigned claims plans or judgment funds. See funds of last resort: assigned claims plans and judgment funds.
- Your insurer's own recovery. After paying you, your insurer may try to recover from the driver (subrogation). That recovery is a debt like any other and can be discharged in ordinary cases.
If the debt is not dischargeable
A judgment for an intoxicated driving injury or a willful injury survives, so the injured person can continue to collect after the case closes, using state collection laws. A judgment does not expire quickly in most states, but it may need to be renewed on a schedule that varies by state; ask a lawyer about the rule where the judgment was entered.
A worked example
Say a driver carrying only the state's minimum liability limits (hypothetically 25/50/25) runs a red light and seriously injures a pedestrian. The pedestrian wins a $300,000 judgment. These numbers are invented to show the mechanics.
| Fact pattern | Insurance pays | Remaining judgment | If the driver files bankruptcy |
|---|---|---|---|
| A. Careless driving, insured at 25/50/25 | Up to $25,000 for this person | About $275,000 | The remaining amount is generally dischargeable; the pedestrian may also have underinsured motorist coverage that pays part of the gap |
| B. Same crash, but the driver was convicted of drunk driving | Up to $25,000 (subject to the policy terms) | About $275,000 | The injury judgment survives under 523(a)(9); the pedestrian can continue to collect |
| C. No insurance at all, careless driving | $0 | $300,000 | Dischargeable; the pedestrian's uninsured motorist coverage is the main source |
| D. A deliberate attempt to hit the pedestrian | Many policies exclude intentional acts | $300,000 | May survive if the court finds willful and malicious injury; the pedestrian must ask the court in time |
What to do next
If you are a driver facing a judgment, you should:
- Talk to a licensed bankruptcy attorney before filing, because timing, chapter choice and the intoxication and willful-injury exceptions can change the outcome.
- Gather the declarations pages of every policy that may apply, including any umbrella or excess coverage (bodily injury liability).
- Do not move or transfer assets to avoid a judgment; the Bankruptcy Code denies a discharge to a debtor who transfers property with intent to hinder, delay or defraud creditors (section 727(a)(2)).
If you were injured, you should:
- Report the crash to your own insurer and ask about uninsured and underinsured coverage.
- Ask the other driver's insurer, in writing, to confirm all coverage.
- Watch for a bankruptcy notice; if one arrives, speak to an attorney about deadlines the same week.
- Keep every bill and record.
Common questions
Does bankruptcy erase a judgment for damage to my car?
Property damage is not mentioned in the intoxicated driving exception, which covers death and personal injury. An ordinary property damage judgment against a driver is generally dischargeable, but you should check with counsel for the details in your case. Your collision coverage or uninsured motorist property damage coverage, where available, avoids the problem.
Can an insurer refuse to renew because a driver filed bankruptcy?
That is a question of the state's nonrenewal rules and the insurer's filed underwriting rules. Bankruptcy can affect a credit-based insurance score in states that allow credit in rating. See cancellation and nonrenewal rules: notice periods and allowed reasons for the general framework.
Does a Chapter 13 plan pay the injured person?
A judgment creditor is typically an unsecured creditor in the plan and receives whatever the plan provides for that class, which may be a fraction of the debt. A debt that is not dischargeable, such as an intoxicated driving injury, remains owed after the plan ends.
What if the driver never lists me as a creditor?
An omitted creditor is a problem for the debtor: the federal courts' page identifies debts not set forth on the lists and schedules as among those not discharged. The injured person should still raise the issue promptly with an attorney.
Key takeaways
- Judgments from ordinary negligent crashes are generally dischargeable in Chapter 7 or Chapter 13; injury or death caused by intoxicated driving is not (11 U.S.C. 523(a)(9)).
- Willful and malicious injury can survive, but the injured person must ask the court to rule in time.
- Under Perez v. Campbell (1971) and section 525(a), a state cannot suspend a license solely for failure to pay a discharged judgment; the rules for debts that survive are less clear, so ask the state.
- Bankruptcy does not cancel the driver's insurance; injured people can pursue the policy and their own uninsured and underinsured motorist coverage.
- Exemptions and collection rules are largely state law, so what a judgment is worth depends on where the driver lives and what the driver owns.