When the Defendant Files Bankruptcy: Why Insurance Still Pays Your Ohio Injury Claim

Published September 19, 2023 · Injury Law Basics

You have been through the crash, the surgery and months of therapy. Your lawsuit is finally moving. Then a letter arrives from a federal bankruptcy court with the other driver's name on it, and everything stops. Many people assume this is the end of their case.

It usually is not. A bankruptcy filing pauses an injury case and changes some of the steps, but it does not erase the at-fault driver's liability insurance, and in the right circumstances it does not erase the debt either. Here is what is going on and what you should do.

A quick note first: our office does not practice bankruptcy law, and every bankruptcy has its own wrinkles. This post explains the general framework so you know why the claim is still worth pursuing.

The automatic stay: why everything stopped

The moment a person or business files for bankruptcy, federal law imposes what is called the automatic stay. Under 11 U.S.C. 362(a)(1), the filing stops the commencement or continuation of lawsuits against the debtor (the person who filed) over claims that arose before the bankruptcy. Your injury lawsuit is one of them. The state court judge has to put the case on hold, and you cannot take new steps against the debtor without the bankruptcy court's permission.

The stay is designed to give the debtor breathing room and to stop creditors from racing each other to grab assets. It is not a ruling on whether the debtor caused your injuries, and it is not permanent.

Getting the stay lifted to go after the insurance

The bankruptcy court has authority under 11 U.S.C. 362(d)(1) to lift or modify the stay "for cause." In injury cases, one common request is to let the lawsuit go forward for the limited purpose of establishing the debtor's liability and collecting from the debtor's liability insurance policy, with the injured person agreeing not to collect from the debtor's personal assets in the bankruptcy.

Why do bankruptcy courts often allow this? Because a liability insurance policy exists to pay claims like yours. Paying them out of the policy does not take money away from the debtor's other creditors. The insurance company has also usually been defending the case all along, so letting it continue costs the bankruptcy estate little.

The discharge does not wipe out the insurer's obligation

At the end of a typical consumer bankruptcy, the debtor receives a discharge, which wipes out the debtor's personal obligation to pay most debts. People reasonably worry that this kills their injury claim.

Here is the key point. Under 11 U.S.C. 524(e), the discharge of a debtor's debt "does not affect the liability of any other entity" on that debt. An insurance company is another entity. The discharge protects the debtor personally; it does not release the insurer from its promise to pay, up to its policy limits, claims against the person it insured.

Ohio law then gives you a way to reach that coverage directly. Under R.C. 3929.06(A)(1), when you obtain a final judgment for bodily injury against someone who was insured against that liability when your claim arose, you are entitled to have the remaining limits of that person's liability policy applied to the judgment. If the insurer has not paid within thirty days, R.C. 3929.06(A)(2) allows you to file a supplemental complaint against the insurer in the same court. The insurer can raise coverage defenses, but it cannot hide behind its insured's bankruptcy.

Some injury debts survive bankruptcy entirely

Bankruptcy law does not allow everyone to walk away from the harm they caused. Two exceptions matter most in injury cases:

• Drunk and drugged driving. Under 11 U.S.C. 523(a)(9), a debt for death or personal injury caused by the debtor's operation of a motor vehicle while unlawfully intoxicated from alcohol, a drug or another substance is not dischargeable. A drunk driver who injures you cannot use bankruptcy to escape the judgment, including amounts above the insurance limits. We have written about holding impaired drivers accountable in our post on punitive damages against drunk drivers.
• Willful and malicious injury. Under 11 U.S.C. 523(a)(6), a debt for willful and malicious injury is not dischargeable either. An intentional assault or a deliberate road-rage attack can fall into this category. But there is a catch: under 11 U.S.C. 523(c)(1), this exception generally applies only if the injured person asks the bankruptcy court to rule that the debt is not dischargeable, within the deadline the bankruptcy rules set. Miss that step and the debt may be discharged. If you receive a bankruptcy notice in a case involving intentional harm, call a lawyer immediately.

What to do when you get a bankruptcy notice

1. Do not ignore it. Read it for the deadlines it lists, including the date of the meeting of creditors and the deadline to file a proof of claim.
2. Do not contact the debtor to collect. Doing so can violate the automatic stay.
3. Make sure your claim is listed. A proof of claim, and in some cases a request for relief from the stay or a determination that your debt is not dischargeable, may need to be filed in the bankruptcy court.
4. Keep the injury case alive. The bankruptcy changes the procedure, not the underlying deadlines that apply to your claim. Our guide to deadlines and the timeline of an Ohio injury case explains the filing deadlines that govern the injury claim itself.
5. Look at your own coverage. A driver who files bankruptcy often had little insurance to begin with. Your own underinsured motorist coverage may make up the difference.

When the at-fault driver had too little insurance

Bankruptcy filings and minimum insurance limits tend to go together. Ohio requires only $25,000 per person in liability coverage, which, as we explained in why Ohio's minimum limits are not enough, will not cover a serious injury. When the at-fault driver's policy is too small and the driver has no assets, your own uninsured and underinsured motorist coverage becomes the most important source of recovery. Our guide chapter on using your own insurance and our page on UM/UIM claims in Ohio explain how it works, including the notice and consent requirements that must be followed before any settlement.

What this means for you

A bankruptcy notice is not a verdict against you. In most injury cases, the real target has always been the insurance company, not the at-fault driver's personal savings, and the insurance obligation survives the bankruptcy. What changes is the procedure: there are new deadlines, new filings and a federal court to satisfy. Those steps have to be handled carefully and on time.