Pending bankruptcy can affect other suits
One of the many things that must be considered during Chapter 13 bankruptcy is how bankruptcy protection affects things that we often take for granted.
April 10, 2014
Pending bankruptcy can affect other suitsArticle provided by Durand & Associates, P.C.
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One of the many things that must be considered during Chapter 13 bankruptcy is how bankruptcy protection affects things that we often take for granted. One example is the right to sue others for money not related to the bankruptcy, such as personal injury.
In short, someone undergoing the bankruptcy process has a continuing duty to disclose that her or she is contemplating or entering into litigation that may affect her financial situation. This duty is maintained at all steps prior to discharge of debts via the bankruptcy process. Failure to comply could prevent the other lawsuit from going forward, and/or could mean that any winnings are turned over to creditors first.
A recent federal appeals case illustrates this. The debtor filed for bankruptcy in 2004. In July 2007, she filed an amended bankruptcy plan which was accepted. In March 2008, she filed suit for injuries sustained in a car accident the previous year. She did not disclose the lawsuit to the bankruptcy court. In November 2008, her debts were discharged. When the defendants in the personal injury claim learned of the bankruptcy, they notified the bankruptcy court of the debtor's actions and asked that this prevent her from filing suit. The case made its way through the courts, and the Fifth U.S. Circuit Court of Appeals agreed.
The court's reasoning was based on a principle called judicial estoppel. This means that someone cannot argue one thing to a court and then argue something different to a different court. In the case of the debtor described above, she had failed to disclose the personal injury case to the bankruptcy court, which the court took as in essence a denial that the claim existed. By filing the personal injury suit, she took the opposite position, namely that her claim did exist. Because she had earlier taken the position that she had no personal injury claim, she was prevented from taking a contrary position later.
Although the individual debtor could not pursue the claim, the court did hold that the bankruptcy trustees could on her behalf. This means that any funds won would be given to the creditors who were involved in the bankruptcy process. The court explained that this was to prevent the creditors from being harmed because the debtor failed to disclose something (the personal injury suit in this case) to the court. The court also rejected an argument from the defendants in the personal injury suit that any damages given to the trustees be limited to the amount owed to creditors for the same reason.
The bankruptcy process is a complex one, and can take unexpected turns. If you are facing overwhelming debt, it is important to contact an experienced bankruptcy attorney right away. The right advice at the beginning can save a world of headache later.