Protecting Your Lawsuit During Bankruptcy

Any claim that a debtor may have at the time a bankruptcy case is filed is considered an asset and must be disclosed to the bankruptcy court. This includes lawsuits that are currently pending in court or through an administrative process, and those that are not yet filed. Social Security Disability claims, Worker’s Compensation claims, unemployment claims, class action lawsuits, and personal injury lawsuits are all claims that must be disclosed to the bankruptcy court.

Keeping any money obtained from a legal claim (after settlement or adjudication) depends on several factors. For instance, if the bankruptcy case is a Chapter 13, the debtor does not lose any property, but must pay unsecured creditors an amount equal to the value of non-exempt property. Another factor is whether the claim or any money received from the claim is “property of the bankruptcy estate.” Some legal claims, like retroactive social security benefits, are protected by law and are excluded from the debtor’s bankruptcy case. Money from a legal claim may be protected using federal or state law exemptions. In some cases a claim is entirely exempt; in other cases a claim is protected only to a certain dollar amount.

The Bankruptcy Code states that the debtor must disclose “all legal or equitable interests” in property as of the date the bankruptcy case is filed. The debtor who fails to report an interest in a claim and later receives money is at risk of losing the entire payment. The bankruptcy judge and trustee will be very reluctant to permit a debtor to keep money that was hidden from the court, and the court is likely to disallow any claim of exemption. In some extreme cases, the trustee may complain that an omission is intentional and ask to revoke or deny a discharge on the basis of fraud!

The federal bankruptcy laws contain powerful protections for the honest debtor. It is extremely important to discuss any pending or potential claim with your bankruptcy attorney. Reporting any claim is the first step in protecting any money from turnover to creditors. Your attorney can also cooperate with any concurrent litigation to maximize your recovery.