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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 example....you 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 bad...got 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.

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