You may be tempted to leave pending lawsuits and claims you have against someone else off your Chapter 7 bankruptcy petition and schedules. But failing to disclose lawsuits and legal claims in your bankruptcy is a big mistake. It's an act of dishonesty which could lead the bankruptcy court to deny your discharge and criminal charges. In addition, not disclosing the legal claim in your bankruptcy case may make it impossible for you to ever recover damages for the claim--even if the amount would be more then enough to pay your debts in full.
You Must Disclose Lawsuits and Other Claims in Your Chapter 7 Case
When you file for Chapter 7 bankruptcy, a bankruptcy trustee is appointed to liquidate or sell any property that you are not permitted to keep under the law. You must file documents (called schedules) that list all of your debts as well as everything you own on the date of your bankruptcy filing. (Learn more about the bankruptcy petition and schedules.)
While it might seem that money you have not yet collected isn't yours and does not need to be listed, that is not the way it works in bankruptcy. As long as the act which gave rise to or created the legal claim took place before you filed for bankruptcy, it must be listed in your schedules. This includes insurance claims whether or not they have been filed as well as lawsuits and potential lawsuits. For example, if you were injured in a car accident that took place a few months before your bankruptcy filing, you must list this as a claim, even if you have not yet filed a lawsuit or received insurance money.
The Bankrutpcy Trustee’s Right to Pursue Lawsuits
Your Chapter 7 bankruptcy does not stay or suspend any lawsuit you filed against someone else before you filed your bankruptcy case. But if you cannot claim the lawsuit as exempt, you no longer have the right to pursue the suit. The lawsuit becomes property of your bankruptcy estate and the Chapter 7 trustee takes control. The trustee can continue the lawsuit, or with court approval, can settle it. This is the case even if the amount you are seeking to recover in the lawsuit would be sufficient to pay all of your creditors in full.
If you properly disclose the lawsuit in your bankruptcy, however, you will get any excess recovery after the trustee pays your bankruptcy claims and the bankruptcy costs and fees.
If you don’t disclose the lawsuit in your bankruptcy, this may not happen. Most courts that have considered these cases have ruled that if you fail to disclose the lawsuit in your bankruptcy you are estopped (prohibited by your own actions) from collecting on the suit in another court.
The reasoning behind judicial estoppel is this: By failing to list the lawsuit in your bankruptcy schedules (which you declare to be true under penalty of perjury), you are denying that the claim exists. You cannot be allowed to pursue and collect damages on a claim in one court, while in another, you deny that you even have a claim.
Will the Trustee Be Prohibited From Pursuing the Lawsuit if You Fail to Disclose It?
The courts will generally apply this prohibition against you if you did not disclose the lawsuit in your bankruptcy. But how your failure to disclose affects the trustee's right to pursue and collect on the lawsuit varies.
- Some courts allow the bankruptcy trustee to pursue the lawsuit for the full amount claimed.
- Some courts limit damages to an amount sufficient to pay creditor claims in the bankruptcy. This eliminates any excess that the debtor would otherwise have gotten.
- Other courts apply judicial estoppel more harshly and prohibit any recovery at all, either by the bankruptcy debtor or the trustee, without regard to who would ultimately receive the money.
Denial of Discharge and Criminal Sanctions
If the court finds that you intentionally failed to list the lawsuit or claim in your bankruptcy, it is likely that the court will deny your discharge. If the court has already granted a discharge, it will likely revoke it (take it away). If the courts do not allow the trustee to pursue the suit when it is discovered, you will remain on the hook for any debt that could have otherwise been paid from the lawsuit proceeds.
Even worse, you may be subject to criminal sanctions. Concealing assets and making false oaths in your bankruptcy case are federal crimes which are punishable by fines up to $500,000 and up to five years in prison.