Receiving a large legal settlement can be scary if you have unpaid debts. The money is supposed to compensate you for the injuries and suffering you endured, not pay off your creditors. If they take your personal injury settlement, how will you pay your other bills?
The good news is that personal injury settlements are generally protected from garnishment under California law. Creditors can’t legally garnish money needed for your basic living expenses. However, exceptions apply for medical liens, unpaid taxes, and overdue child or spousal support.
This article examines personal injury settlement garnishments with a specific focus on California law. We cover situations when you can be garnished, who can garnish your settlement, how to avoid it, and what to do if it happens.
What Is Garnishment of a Personal Injury Settlement?
Garnishment of a personal injury settlement is when a creditor legally seizes part of the settlement directly from your bank account to cover an unrelated debt. It generally requires a court order and happens only after the settlement enters your account. Garnishment differs from liens and insurance reimbursements, which are deducted from your settlement before you’re paid.
When Can Your Personal Injury Settlement Be Garnished?
A personal injury settlement can be garnished under limited legal circumstances. Apart from the exceptions below, settlements are generally protected from third-party creditors.
- Medical liens from healthcare providers who treated your accident-related injuries. These are often deducted before the money reaches your account, but they can sometimes be processed as a garnishment.
- Delinquent government obligations to agencies such as the IRS, California Franchise Tax Board (FTB), and child or spousal support agencies. Any overdue taxes or family support payments can be garnished from your settlement.
- Pre-settlement funding repayments will come from your settlement. Any lawsuit cash advances you request are payable once your settlement money comes in.
Who Can Garnish Your Personal Injury Settlement in California?
Only parties with a court-ordered claim to your money can garnish a personal injury settlement in California. Garnishment is not the same as general debt collection, and most creditors will not have access to your settlement. The following parties may legally seek payment through garnishment.
- Judgment creditors the court has granted a formal money judgment against you. Everyday consumer creditors who have not obtained a court order for your money cannot legally garnish your settlement.
- Medical lienholders who placed a lien on a portion of your settlement to pay off medical costs related to the injury. Unrelated medical debts do not qualify for garnishment unless a separate court order is in place.
- Government agencies such as the IRS, the California Franchise Tax Board (FTB), the U.S. Department of Education, or the Department of Child Support Services can legally garnish settlements for back taxes or defaulted obligations.
- Pre-settlement funding companies that offer lawsuit advances based on your prospective settlement. You are contractually required to pay them back using your settlement money.
- Family law judgment creditors, such as ex-spouses or co-parents who are collecting court-ordered child support or alimony. Again, a court order must be in place.
- Government healthcare programs, such as Medi-Cal or Medicare, that covered the medical costs related to the personal injury claim. State and federal law allows these bodies to collect reimbursement directly from your settlement.
- Bankruptcy trustees for Chapter 7 or Chapter 13 bankruptcy only apply if you file for bankruptcy during or directly after the settlement proceedings. Garnishment for bankruptcy debts is limited in California, so they can’t take your entire settlement.
Can Creditors Legally Garnish Your Personal Injury Settlement in California?
Creditors cannot legally garnish your personal injury settlement in California unless they have a court-ordered money judgment against you. If they do, they are called judgment creditors. Even then, judgment creditors do not have access to your entire settlement.
Under California Code of Civil Procedure § 704.140, judgment creditors may only garnish money that is not strictly required to support yourself, your spouse, and your dependents. That means they cannot garnish so much that it eats into your living expenses. This limit does not apply to healthcare providers seeking reimbursement for medical care related to your settlement. Child support agencies may also be exempt from this limit under CCP § 703.070.
For unpaid student loans and taxes, federal law overrides California statutes on settlement garnishing. Federal government agencies hold collection authority and can legally garnish as much of your settlement as required to cover your debts.
What to Do If Your Personal Injury Settlement Is Garnished?
If your personal injury settlement is garnished, you have the right to challenge it in court. Review the paperwork carefully and contact your attorney as soon as you can. Here’s what to do immediately after you find out about the garnishment.
- Check the notice of garnishment for important details. Find out who is garnishing you and how much they’re claiming, as well as any deadlines for filing a challenge.
- Collect financial documents that prove your monthly expenses and income, for example, pay stubs and monthly bills. California law prohibits creditors from garnishing so much money that you cannot support yourself.
- Contact the personal injury attorney who handled your case to check that the garnishment order was executed lawfully.
- File a claim of exemption with the court and request a hearing to get the garnishment canceled or reduced based on your living expenses.
- Notify the bank and levying officer of the exemption you’re pursuing. This notification ensures that they don’t release funds to your creditors before the court issues an official ruling.
- Contact the creditor to discuss alternative options to garnishment. Consider settling the debt outside court through a payment plan or hardship settlement.
How to Protect a Personal Injury Settlement from Being Garnished?
You must be proactive to avoid garnishment and take steps to protect your settlement before it enters your bank account. Your attorney can help you plan for garnishment before it happens. While it’s not guaranteed that you can avoid it completely, here are some of the best measures to take.
- Set up a separate bank account for the settlement proceeds. If the money is mixed or “commingled” with your other income and expenses, it becomes more difficult to prove exempt status under California law.
- Get your settlement as structured payments rather than a lump sum. When you receive it this way, it’s like a monthly paycheck and subject to strict wage garnishment laws that cap how much creditors can take.
- Negotiate lien reductions and debt satisfactions before the settlement comes in. Your lawyer can contact your creditors pre-settlement to discuss reduced repayment rates and settle outstanding debts outside of court.
- Establish a Settlement Protection Trust to hold your settlement money and shield it from creditors. Keeping the funds in a trust makes garnishment more difficult.
Protect the Compensation You Deserve with HHJ Trial Attorneys
Despite the legal protections in place in California, a portion of your personal injury settlement can be garnished by judgment creditors. And if you have outstanding debts to federal government bodies or family support agencies, state garnishment limits may not apply. That being said, you can protect your settlement from garnishment through proactive planning with an experienced lawyer.
HHJ Trial Attorneys is an award-winning legal team operating throughout California. We can help you navigate the complexities of garnishment to protect your settlement from creditors. If you have questions about garnishment, liens, or settlement distribution, contact us for a free consultation.
