Filing a lawsuit during a Chapter 13 case triggers disclosure obligations, potential schedule amendments, and may require you to pay more to your unsecured creditors.
If you file a lawsuit during your Chapter 13 case, you must disclose that fact to the bankruptcy court, your Chapter 13 trustee, and your bankruptcy lawyer. You must also amend your bankruptcy schedules if the claim isn't already listed, and you could be required to pay more into your Chapter 13 plan.
You Must Disclose the Lawsuit to the Bankruptcy Court
If the basis for the lawsuit happened before you filed for Chapter 13 bankruptcy, you should include the potential claim in your bankruptcy schedules. A potential legal claim or lawsuit—even one not yet filed—is an asset, just like your home, car, and bank accounts. Even if you don't know whether the lawsuit has any value, it could be resolved as a settlement or judgment with monetary value in the future. (11 U.S.C. § 541.)
If You Learn of the Claim Later, Amend Your Schedules
Often, people aren't aware that they have a legal claim when they file for Chapter 13 bankruptcy, even if the underlying event has already occurred. If this happens, you must disclose the claim to the court when you learn of it—you do this by amending your Chapter 13 schedules. If you don't, you could later lose your right to any damages from the claim.
Here are some examples of when this might happen:
- After you filed Chapter 13, you learned that a medication you had been taking for years was being taken off the market because of serious side effects that you and others had suffered.
- After you filed Chapter 13, you learned that a chain of restaurants you once worked for was being sued in a class action to compensate servers for wages that had been shortchanged.
- Two months before you filed Chapter 13, you were hit by a driver who ran a red light. The driver's insurance company paid to replace your car, which you reported on your Chapter 13 paperwork. After you filed, you discovered that you had suffered medical issues caused by the accident.
Claims That Arise After You File for Chapter 13
A lot can happen during the three to five years it takes to complete a Chapter 13 payment plan. Claims that arise during the Chapter 13 case are also property of the bankruptcy estate, and you must disclose them to the bankruptcy court. If you think you have a claim against someone else—even if you don't plan to file a lawsuit—contact your attorney to discuss whether you need to disclose it. (11 U.S.C. § 1306.)
How a Lawsuit Affects Your Chapter 13 Case
Filing a lawsuit during your Chapter 13 case might affect the amount of your plan payments if
- the settlement or award is not exempt property, or
- the proceeds are considered to be disposable income.
When the Lawsuit Award Is Nonexempt Property
In a Chapter 13 case, you must pay the value of any nonexempt property to your unsecured creditors through your Chapter 13 plan over the life of your plan period, or between three and five years. You'll start by determining whether the lawsuit can be protected with a bankruptcy exemption. If the proceeds of your lawsuit won't be exempt, the bankruptcy court will likely require you to contribute at least a portion of the proceeds to your Chapter 13 plan payment. (11 U.S.C. § 1325(a)(4).)
When the Lawsuit Award Counts as Disposable Income
Even if your lawsuit proceeds are exempt property, you may still have to devote some of the settlement or award to your payment plan. In Chapter 13 bankruptcy, you must devote all of your disposable income—income not reasonably necessary for the support of you or your dependents—toward paying unsecured creditors. (11 U.S.C. § 1325(b).)
If any of the lawsuit proceeds are considered disposable income, the Chapter 13 trustee might file a motion asking the court to order you to amend your payment plan to include some or all of the proceeds to pay unsecured creditors.
Example. Suppose your disposable income is $500 per month, so your plan payment is $500 per month. Two years into your Chapter 13 plan, you settle a lawsuit for $50,000. Your Chapter 13 trustee might argue that the $50,000 is income not necessary for your support and that the settlement money should be paid into your plan for the benefit of your creditors.
The Bankruptcy Court Must Approve Your Settlement
Because the lawsuit is part of your bankruptcy estate, the bankruptcy court will have to approve any settlement you propose, particularly to ensure that the attorneys' fees and costs in the lawsuit are reasonable. (Fed. R. Bankr. P. 9019.)
Can You Wait to File the Lawsuit Until After Your Chapter 13 Case Ends?
In many cases, if you wait until your Chapter 13 case is over to file your lawsuit, the statute of limitations—the time period within which you must bring a lawsuit on a claim—will have run. Check with your attorney on the timing.
Keep in mind that even if you file the lawsuit later, you'll still have to disclose the potential legal claim to the court during your Chapter 13 case. Otherwise, you might run into trouble in your Chapter 13 case and could be prohibited from pursuing the lawsuit down the line.