Bankruptcy and Personal Injury

Unfortunately, many times individuals have to file for bankruptcy protection after a catastrophic injury.  It is very important to ask a client if they are in bankruptcy and to have them notify you if they file for bankruptcy during the litigation.  So what happens when they don't? Kimberly Lentz over at chapter7trustee.net has 5 good reasons a debtor should disclose all potential claims:

1.         The debtor will avoid prison. http://www.justice.gov/ust/r05/docs/general/press/2009/pr20091106.pdf.

2.         The willful failure to disclose assets is fraud and could result in the denial or revocation of the debtor’s discharge. In re Sholdra, 249 F.3d 380 (5^th Cir. 2001); In re Beaubouef, 966 F.2d 174 (5^th Cir 1992); In re Chalik, 748 F.2d 616 (11^th Cir. 1984).

3.          Under the doctrine of judicial estoppel it is unlikely that the debtor will ever prevail in the pursuit of the cause of action.   Judicial estoppel operates sort of like an admission. Failure to disclose a cause of action is treated as if the debtor admitted that it did not exist.  Reed v. City of Arlington, 650 F.3d 571 (5^th Cir. 2011); Kane v. National Union Fire Ins. Co., 535 F. 3d 380 (5^th Cir. 2008); In re Superior Crewboats, Inc., 374 F.3d 330 (5^th Cir. 2004); In re Coastal Plains, Inc., 179 F. 3d 197 (5^th Cir. 1999).  (More on judicial estoppel in future posts)

4.         The debtor could receive a surplus distribution after creditors’ claims are satisfied.  Although the debtor may have scheduled numerous unsecured creditors, only creditors who file Proofs of Claim are entitled to a distribution from the bankruptcy estate.

5.         If the debtor owes taxes or has non-dischargeable debts, he will benefit from distributions made by the bankruptcy trustee.