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Thursday, March 18, 2010

Failure to schedule claims

There is a recent decision out of New York regarding the failure to schedule a claim as an asset of the bankruptcy estate. The unfortunate result of that is that the bankruptcy court has ruled that the debtors no longer have the capacity to sue due to the lack of disclosing that potential claim on their bankruptcy schedules. In this particular case it had to do with the bankruptcy trustee who was administering the debtor's estate that was determined could not "step into the debtor's shoes" to sue on behalf of the bankruptcy estate in order to attempt to recover assets to administer for the benefit of the debtor's creditors.

Although that particular set of circumstances might not be of particular concern for an individual debtor it does point out the fact that it is very important to disclose any potential claim that one might have on your bankruptcy schedule of assets. Even if you've haven't sued anyone, haven't talked to a lawyer about or even haven't talked to your mom about it you still need to list it on your bankruptcy schedules.

A potential claim is an interest in property that exists at the time the cause of action arises. So, for go to your local grocer and slip/fall because there were squishy grapes on the floor the kid in the produce department didn't get cleaned up. You didn't feel too up, dusted yourself off and went about your business. You got up the next day and your back was really stiff and achy...but you got over it. A number of months later your back is starting to hurt again. It gets worse...lots worse. You go to your doctor or chiropractor. The only thing that you can point to is that fall you took at the grocery store. You decide to sue the store. It also is a fact that you filed a bankruptcy case sometime after you took the tumble but before you determined that it was that fall that was the root cause of your injury. It doesn't register in your head what your attorney had said when he/she was eliciting information from you to put your bankruptcy case together that it was important to list any potential claim of that nature as one of your assets.

Two problems.

First, as the case out of New York held recently. You may now not be able to sue on the claim...period.

Second, lets say no one involved in this deal knows about the bankruptcy. The personal injury attorney you hired to pursue the claim doesn't ask about bankruptcy filings and you don't think to mention it. The store gets sued. They hire a top gun defense attorney (most likely their insurance company will). He's not a "top gun" insurance defense attorney for no reason. He sniffs around...a lot. He checks the public record and finds out you filed a bankruptcy case sometime after the slip/fall occurs. He then checks the bankruptcy schedules that are of record with the bankruptcy court. Finds that you failed to disclose the cause of action on the claim that you are suing his client on. Bingo! He's worth the big bucks that the insurance company is paying him and then some. He's now got evidence that you provided information in a federal court matter under the penalty of perjury that you swore in writing was correct as well as testified on the record at your bankruptcy hearing before the bankruptcy trustee that the schedules were accurate and indeed listed all of your assets. In the court case regarding your personal injury claim he can then enter those bankruptcy schedules into evidence. He'll put you on the stand and grill you....making you admit that you perjured yourself in the bankruptcy proceeding. He will then point out to the judge or jury that anything you say in this personal injury action cannot be taken as truthful considering you lied about the claim in the bankruptcy case. Your "veracity" or penchant for truthfulness is then completely destroyed and you, my friend, unfortunately will lose the personal injury action.

Best policy. List the claim. You can probably exempt (protect) most if not all of the potential recovery. Not listing is as a potential asset can be catastrophic. If, in the above example the debtor when he discovered he had a claim...which in that set of facts was after he filed the bankruptcy case there is an easy enough fix. Re-open the bankruptcy case to disclose the asset and put all parties on notice that it is "out there". Failure to list it in that situation was excusable...didn't really know he had the claim until later. Knowing you've got a claim and failing to list it either from the get go or neglecting to schedule by re-opening the bankruptcy case if you determined after you filed your bankruptcy that you did have a claim you want to pursue to get some compensation for your injuries will be fatal to your opportunity to recover on that claim.

Wednesday, March 3, 2010

Exempting tax refunds

It's a busy time of year for most bankruptcy attorneys. Especially in my region of the country where we aren't allowed to put our clients on a payment plan for the fees. Many will use their tax refunds to fund their bankruptcy case filing. But what about those who file bankruptcy but haven't received their tax refunds yet? Most folks are concerned whether or not the refund can be protected. The process by which assets are protected in bankruptcy is known as "exempting" it. Exemptions are the statutory rules of law that allow debtors to keep certain amounts and certain types of property. The answer to the question of "can I keep my refund?" is almost always yes with some certain exceptions.

To exempt an asset there has to be an exemption that covers it and the value of the property must not exceed the limitation of the exemptions. While there used to be unlimited exemptions for certain types of property they have, at least here in Minnesota, been declared unconstitutional by the courts for those exemptions found under the state statutes. Further, there are no exemptions available under the state statutes specifically for that kind of asset anyway. Not to worry though as we here in the great state of Minnesota have the option of using Federal exemptions found in the United States Bankruptcy Act which is under Title 11 of the United States Code. Under the federal exemptions there is a "wild card" exemption that can be applied to anticipated tax refunds (as well as other types of property where there is no specific exemption for that particular species of asset). It isn't unlimited but it is fairly generous and most folks will be able to protect the refund no problem.

Some debtors think that if they wait to file their tax returns that the refund does not factor into the bankruptcy case as an asset of the bankruptcy estate. Nothing could be further from the truth. It is an assets that while you may not have it in hand at the time your file your case you are entitled to once you file the appropriate return. Not filing the return does not extinguish your present day future possessory interest in the refund. So...when we file cases for our clients we get their best estimate from them so it can be fully disclosed on the schedules and properly exempted. If not, some trustees will take the position that the refund is property of the bankruptcy estate and theirs to administer for the benefit of creditors unless it is properly exempted. Therefore, it is always best to made an educated guess, disclose the asset and exempt it to the extent that there are exemptions available. In the odd case where all or part of the refunds may not be exempt the trustee is entitled to the refund (or that portion thereof that is not exempt) once the refunds have been received by the debtor. If the debtor fails to cooperate and turn over the funds the bankruptcy trustee would then bring a motion to require turnover of the funds. If the debtor still does not comply would then bring a motion to revoke the bankruptcy discharge. Neither is desirable, of course, and a revocation of discharge is a catastrophe. Debtors complaining that they received the money and spent it already is never a good defense in cases where the refunds were not exempt on the filing of the case. Remember..if you got the refunds prior to the case filing there is no problem although if it was a large refund the trustee may have questions regarding what you did with the refund which can open up a whole another can of worms if friends, family members were paid as preferred creditors soon before filing, etc. That though is another topic for another time.

If you'd like to learn more about us, how bankruptcy works and how we may be able to help you please click the link here for our website which contains much, much more information on the bankruptcy process.