A question that often comes up in my practice is whether lawsuits, potential lawsuits or other types of legal claims need to be disclosed on a bankruptcy petition. The resounding answer to this question is definitely yes. In fact, if you leave off an injury or workers compensation lawsuit it will probably end up hurting the future of your case outside of bankruptcy. This article will explore the necessity of disclosing these claims, detailing how and when they should be included in your bankruptcy filing.
Why Disclosure is Crucial: Statutory Authority
During creditor meetings in both Chapter 13 and Chapter 7 bankruptcy cases, trustees frequently ask, “Do you have the right to sue anyone?” This question is crucial because, under bankruptcy law, the right to sue someone is considered an asset, even if a lawsuit has not yet been filed. For example, if you were defrauded out of $1,000,000 but have not initiated legal action, the right to sue for that fraud still must be disclosed in your bankruptcy filing. It is considered an asset.
According to 11 U.S.C. § 521(a)(1)(B)(i), the debtor is required to file “a list of creditors; and unless the court orders otherwise, a schedule of assets and liabilities.” This statutory requirement explicitly includes any potential lawsuits as assets that must be disclosed for inclusion in the bankruptcy estate. Failure to do so can result in severe legal consequences, including potential charges of perjury or bankruptcy fraud, and may bar you from pursuing those claims in the future.
Understanding the Bankruptcy Estate
When you file for bankruptcy, all your assets become part of a bankruptcy estate and are managed by a trustee. Legally, you no longer own these assets for the duration of your bankruptcy. The bankruptcy estate is under the trustee’s authority and can be used to pay creditors if necessary.
The duration of this trusteeship depends on the type of bankruptcy you file:
Chapter 13 Bankruptcy: The trusteeship can last between 3 and 5 years, or even longer if you fall behind on your repayment plan.
Chapter 7 Bankruptcy: The trusteeship typically lasts about 120 days.
The existence of a bankruptcy estate often comes as a surprise to many of my clients. It can be unsettling to learn that your assets are temporarily under the control of a bankruptcy trustee. For instance, in Chapter 13 bankruptcy, you need the trustee’s approval to sell your house. However, this is not as daunting as it may seem. With careful planning and professional guidance, the process can proceed smoothly and efficiently.
What is Included in the Bankruptcy Estate?
According to Section 541 of the Bankruptcy Code, the estate encompasses a broad range of property interests. Specifically, it includes:
All Legal or Equitable Interests: Any legal or equitable interests the debtor has in property as of the bankruptcy filing.
Community Property Interests: Any interests in community property that the debtor or their spouse hold, which are liable for claims against the debtor or both the debtor and spouse.
Recovered Property: Interests in property recovered by the trustee under various sections of the Bankruptcy Code.
Preserved or Transferred Property: Interests in property preserved or transferred to the estate under specific sections of the Code.
Post-Petition Acquisitions: Interests in property acquired within 180 days after the bankruptcy filing by bequest, devise, inheritance, or through a divorce settlement.
Proceeds from Property: Proceeds, products, offspring, rents, or profits from estate property, excluding earnings from services performed by the debtor after the case begins.
Post-Filing Acquisitions: Any interests in property acquired by the estate after the commencement of the case.
If you had any of these assets before filing, they must be disclosed, including legal claims such as personal injury or workers’ compensation claims.
Legal Claims Arising After Filing
Under 11 U.S.C. § 541(a)(7), any interest in property acquired by the estate after the case starts must also be disclosed. Thus, if you were to slip and fall at the grocery store in the second month of your Chapter 13 bankruptcy, the legal claim arising from that incident would become part of the bankruptcy estate.
When Does the Bankruptcy Estate End?
All your assets and legal claims remain part of the bankruptcy estate and under the purview of the trustee until your bankruptcy case is officially closed by the court per 11 U.S.C. § 554(c). This closure is distinct from the discharge date, which releases you from personal liability for certain debts. In Chapter 13, the case can remain open for up to 30 days or more post-discharge; in Chapter 7, the process is usually quicker.
Types of Legal Claims to Disclose
As mentioned above, all assets and legal rights you hold as a plaintiff against third parties must be disclosed on your bankruptcy schedules, specifically under Schedule A/B. This includes any claims that arise after your bankruptcy case has been filed. It is essential to amend your schedules to include any new claims, even if they have not yet become lawsuits. Failure to do so may lead to complications if you attempt to litigate these claims outside of bankruptcy. Note that this does not cover situations where you are being sued; such instances are addressed separately in the Statement of Financial Affairs (SOFA).
Here are some common types of plaintiff-side legal claims that would need to be disclosed:
- Personal Injury: Claims related to accidents or injuries.
- Employment Disputes: Claims involving wrongful termination, discrimination, or other employment-related issues.
- Contract Disputes: Claims arising from breaches of contract or disputes over contractual obligations.
- Property Damage: Claims related to damage to property or real estate..
- Medical Malpractice: Claims against healthcare providers for alleged negligence or malpractice.
- Consumer Protection: Claims involving fraud, misrepresentation, or deceptive business practices or FDCPA claims.
- Workers Compensation: Any pending or potential claims related to workers’ compensation benefits.
- Insurance: Claims for benefits or compensation from insurance policies, such as health, auto, or homeowner’s insurance.
- Defamation: Claims for damage to reputation due to slander or libel.
- Family Law Issues: Claims related to divorce settlements, alimony, child support, or custody disputes.
Consequences of Non-Disclosure
Judicial estoppel is a legal doctrine that can have significant consequences if you fail to disclose a potential lawsuit in your bankruptcy proceedings. This principle prevents a party from taking contradictory positions in different legal settings. In the context of bankruptcy, if you omit a potential lawsuit or claim from your bankruptcy schedules, you may be barred from pursuing that claim later in a separate case. The court can invoke judicial estoppel to enforce this, arguing that you should not benefit from a position inconsistent with the one you took during bankruptcy. This means that failing to include a potential lawsuit in your bankruptcy can result in serious legal repercussions, including the dismissal of the lawsuit and potential charges of fraud. Duniver v. Clark, 2021 Ill. App. 200818, (Ill. App. Ct. 2021) and Seymour v. Collins, 2015 IL 118432 (Ill. 2015).
The duty to amend your bankruptcy schedules immediately after a legal claim arises is a strict legal obligation. Failure to do so can lead to significant consequences as mentioned above. There is a narrow exception that depends on the language included in your specific Chapter 13 bankruptcy plan. The plan will specify when the debtor’s property vests, which can be upon confirmation, discharge, or another specified time. The timing of when property vests in the debtor can vary by jurisdiction under 11 U.S.C. § 1327. In Chicago, trustees require that property always vests in the debtor upon discharge. However, in other districts, it can be argued that if property vests in the debtor upon confirmation, there is no duty to amend to disclose post-petition claims, as those assets are considered the sole property of the debtor. This principle is supported by cases such as Waldron v. Brown, 536 F.3d 1239 (11th Cir. 2008), and Robinson v. Tyson Foods, 595 F.3d 1269 (11th Cir. 2010).
Another Possible Scenario: Revocation of Discharge
In the matter of Daniel J. Yonikus, (7th Cir. 1992), the Seventh Circuit Court of Appeals affirmed the revocation of the debtors’ discharge due to their failure to disclose a significant asset—the proceeds from a personal injury settlement. This case underscores the severe repercussions of failing to fully and honestly report all assets during bankruptcy proceedings.
Daniel J. Yonikus, who had been injured in an accident, received a personal injury settlement but did not list this settlement or the related claims on his bankruptcy schedules. Despite obtaining a discharge in his Chapter 7, Yonikus’s failure to disclose these assets—deemed property of the bankruptcy estate—was determined to be fraudulent. The court, citing 11 U.S.C. § 727(d)(2), revoked his discharge because he knowingly and fraudulently failed to report the property.
This case serves as a powerful reminder of the critical importance of complete transparency in bankruptcy. The failure to disclose assets not only jeopardizes the debtor’s discharge but also demonstrates that the bankruptcy process demands utmost honesty to protect both the debtor’s rights and the integrity of the proceedings.
How Much Can You Protect in Bankruptcy?
The irony is that in many cases, you can protect a significant portion of certain types of claims through bankruptcy exemptions. For example, personal injury claims can be protected up to $15,000, and workers’ compensation claims can be fully exempted up to 100% of their value. 735 ILCS 5/12-1001(h)(4) and 820 ILCS 305/21 For other types of claims, however, it is highly likely they cannot be protected. Here is a list of all the bankruptcy exemptions in Chapter 7.
If your case is worth significantly more than these exemption amounts and you need to file for bankruptcy immediately, the situation becomes much more delicate. In such cases, considering a loan against your personal injury claim might be a viable solution. Alternatively, filing for Chapter 13 bankruptcy could provide a strategic option to manage and protect your assets while addressing your debts.
Steven J. Grace is Here to Help
Navigating the complexities of bankruptcy law regarding potential claims requires meticulous attention to detail and a comprehensive understanding of both the legal landscape and your unique financial situation. Steven J. Grace, a seasoned bankruptcy attorney in Chicago, specializes in guiding individuals through these intricate processes. With his 15 years of extensive experience, Steven ensures that clients are fully informed of their obligations and options, helping them avoid common pitfalls and severe consequences, such as those highlighted in the Yonikus case. By offering free consultations, Steven provides the crucial initial guidance needed to explore your bankruptcy options with confidence. Relying on his expertise from the start is your best bet for a smoother, more secure bankruptcy journey.
