Bankruptcy Debtors Often Try To Hide Their Own Claims And Potential Lawsuit Recoveries

No Comments » | Posted by Kiara Withers
Feb 27 2011

Your potential lawsuits against some else, such as personal injury suits or class action suits, are assets in your bankruptcy case. Many people innocently overlook a potential claim that has not yet been filed as a lawsuit; other people intentionally try to “play games” with their claim in order to justify, to themselves at least, omitting their claim and potential lawsuit from their bankruptcy case.

Today’s case in point comes from an exchange I heard in bankruptcy court while waiting for my own client’s case to be called. A man filed Chapter 7 bankruptcy pro-se, that is, without an attorney. After he filed his bankruptcy he initiated a lawsuit in Florida to recover money damages. The defendant settled and agreed to pay the debtor a significant amount of money. The defendant wrote a check to the trust account of the debtor’s attorney. By this time, the debtor’s bankruptcy case has been closed and a discharge entered.

Then the debtor’s civil attorney does something his debtor client did not expect. The attorney checks the public legal records, and he finds out about the bankruptcy filing. The attorney does not want to pay the debtor money which the attorney now knows, as a result of the search, may belong to the bankruptcy trustee. The attorney contacts the trustee. The trustee files a motion to reopen the bankruptcy case to intercept the damage award and distribute the money to the debtor’s creditors. The civil attorney will still get paid. The judge granted the trustee’s motion so the creditors will get the money.

The judge did not penalize the debtor. Maybe the judge felt that depriving the debtor of the money the debtor had expected was enough of a penalty. However, over the past years I have had a few cases where I found out fortuitously about a bankruptcy client’s lawsuit recoveries after their bankruptcy case was over. I think this issue is more common than most people realize. Maybe a court should deny someone’s discharge for not revealing a significant claim that existed before they filed. That kind of case would send a needed message to prospective bankruptcy filers who think they can hide plans to file future lawsuits.

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