Does bankruptcy cover your debt from being sued by an insurance company?

Under some circumstances, chapter 7 bankruptcy after a car accident may cover an insurance lawsuit. Read on to find out if your auto insurance debts are covered by bankruptcy.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Written by Rachel Bodine
Feature Writer Rachel Bodine

Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like and Safeco. He reviews content, ensuring that ex...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent Daniel Walker

UPDATED: Jun 10, 2022

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Things to remember

  • Bankruptcy may cover debt accumulated in an insurance company lawsuit 
  • It may be possible to discharge your debt if you are at fault and sued for more than your insurance policy limit 
  • Chapter 7 bankruptcy will not discharge all debts resulting from collisions 

Auto accidents can be messy and often result in lawsuits. Usually, individuals involved in a car accident will sue for damages if the collision results in injury or even death. You can be sued by your insurance company, but it is far more likely that you will be sued by the other driver’s insurance company. Under the right circumstances, Chapter 7 bankruptcy after a car accident will cover your debt if you are sued by an insurance company.

As long as the collision did not involve a DWI, the average claim of a lawsuit will calculate into a Chapter 7 bankruptcy petition. When this happens, it is possible to discharge any personal injury damages that an insurance company claims.

Does bankruptcy cover debt from being sued by an insurance company?

Whether or not bankruptcy will cover your debt during an insurance lawsuit depends on the facts of the collision, your insurance company, your insurance policy, and your state’s laws. Not all debts get discharged under Chapter 7 bankruptcy after a car collision. Sometimes, drivers can decipher whether their debt will be covered by Chapter 7 bankruptcy without a lawyer.

Debts That Will Not Discharge 

For example, digesting substances like alcohol that impair your driving ability will legally imply that you are at fault for the accident. If your insurance company sues you for damages caused by drunk driving or another form of DUI, Chapter 7 bankruptcy will probably not discharge your debts or honor your bankruptcy petition.

If the driver at fault consumes any substance that impairs driving and a serious injury occurs, your insurance company may place a lien. A lien is a legal tool that will not allow a legal judgment to waive even after you petition for Chapter 7 bankruptcy. Generally, liens protect the interests of creditors or corporations that are owed funds. When an individual or entity has a lien, they hold a legal claim against a piece of property. 

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How does chapter 7 bankruptcy after a car accident work?

Chapter 7 of the United States Bankruptcy Code will not discharge debts for personal injuries or death caused by the debtor’s operation of a motor vehicle while intoxicated. However, auto insurance laws vary state by state. In fact, 48 U.S. states have laws for auto insurance that require all drivers to have a minimum amount of liability coverage. The minimum car insurance required in each state is different.

As such, the way Chapter 7 bankruptcy functions depends on your jurisdiction. To effectively navigate insurance companies, auto insurance laws, and chapter 7 bankruptcy, it may be wise for drivers involved in lawsuits to hire a lawyer. The relationship between state auto insurance laws, Chapter 7 bankruptcy guidelines, and insurance company policies may invoke the need for advice from a legal professional.

Your lawyer will be able to tell you whether or not Chapter 7 bankruptcy will cover your debt after being sued by an insurance company.

What debts get discharged under Chapter 7 bankruptcy? 

Assuming that the driver petitioning under Chapter 7 bankruptcy has not consumed a substance that impairs driving, it is possible to have your debts discharged after a car accident.

There is a chance that an insurance company may settle damages within a driver’s current car insurance policy limits. Your auto insurance company will pay up to the limit of bodily injury to settle lawsuits. An auto insurance company may pursue this route if the insurance company has reason to believe that the driver has limited financial assets and may seek protection under Chapter 7 bankruptcy laws.

Simply put, an insurance company has little to gain by suing a driver for damages above insurance policy limits. If the insurance company chooses to sue above insurance policy limits, then the company is acting in bad faith by not using the policy’s maximum amount to settle the claim. This opens the door for a driver to pursue a claim against their insurance company.

Assuming all parties follow the law and the driver at fault was not under the influence of any mind-altering drug, a driver’s collected debt from a lawsuit filed by an insurance company will likely discharge under Chapter 7 Bankruptcy.

How can I protect myself from lawsuit debt with chapter 7 bankruptcy? 

To protect yourself financially during an insurance lawsuit, you must first qualify for Chapter 7 bankruptcy protection. To qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, corporation, or other business entity. In the case of an automobile collision, the individual attempting to qualify for relief is the driver in debt.

However, an individual may not file for protection under Chapter 7 bankruptcy if another bankruptcy claim was dismissed within the last 180 days due to the debtor’s failure to appear in bankruptcy court or comply with orders of the court. Additionally, if an individual in debt voluntarily dismisses a previous case after creditors sought relief in court and obtained a lien, a driver may not be able to file another Chapter 7 bankruptcy petition.

Auto Insurance and Chapter 7 Bankruptcy 

In simple terms, Chapter 7 bankruptcy discharges unsecured debts, such as credit card debt or an insurance company judgment. However, if a driver possesses hefty financial assets, Chapter 7 bankruptcy may not offer the best protection in the midst of an insurance company’s claim or auto insurance lawsuit.

Drivers can also protect themselves by researching auto insurance policies and plans. The right auto insurance plan can help cover the costs of property damage or medical expenses. While it costs less to purchase your state’s lowest legal auto insurance limits, investing in higher car insurance limits gives you better financial protection if an unexpected accident occurs.

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Will bankruptcy cover debt from being sued by an insurance company? The Bottom Line

Depending on your circumstances, Chapter 7 bankruptcy after a car accident may discharge debts accumulated from an insurance lawsuit. As long as you are not accused of driving under the influence of an impairing substance, there is a chance that Chapter 7 bankruptcy laws will benefit you after an accident.

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