A typical Chapter 13 bankruptcy takes three to five years to complete. If you file a lawsuit (or acquire a right or cause of action to file a lawsuit) while you are in Chapter 13 bankruptcy, you will typically have to amend your petition and disclose it to the court. If you fail to disclose your lawsuit or claim, the court may determine that you are estopped (prohibited) from pursuing it.
Duty to Disclose
When you file for Chapter 13 bankruptcy, you must disclose all of the property you have (including potential lawsuit claims) and propose a plan to pay back some or all of your debts over a three to five year period. In addition, if you acquire or become entitled to any new property while your Chapter 13 case is open, most courts will require you to disclose your new assets.
If you file a lawsuit or acquire a cause of action against someone during your Chapter 13, it will be considered an asset in your bankruptcy. This means that you will need to amend your petition to disclose the lawsuit or claim to the court. (To learn more about how to amend your bankruptcy petition, see How to Amend a Bankruptcy Form.)
Will You Have to Pay the Lawsuit Proceeds Into Your Plan?
Your Chapter 13 bankruptcy trustee might argue that your potential lawsuit proceeds should be paid into your plan and used for the benefit of your unsecured creditors. However, the law is not settled as to whether an asset (such as a lawsuit recovery) acquired after the court has confirmed (approved) your plan is part of your bankruptcy estate and therefore should be paid into your plan. Bankruptcy courts have adopted different approaches to determining whether such an asset should be paid into the plan.
Some of the factors that courts might consider in determining whether your lawsuit recovery must be paid into your plan include:
- whether the cause of action arose before or after your Chapter 13 plan was confirmed
- whether you can exempt the value of the lawsuit or claim (to learn more about how exemptions protect your property in bankruptcy, see our Bankruptcy Exemptions topic)
- the terms of your plan or the order confirming your plan, and
- the rules in your jurisdiction.
What Happens If You Don’t Disclose Your Lawsuit?
Failing to disclose your lawsuit to the bankruptcy court can affect both your bankruptcy case and your lawsuit.
Failure to Disclose Can Create Problems in Your Bankruptcy
If you don’t tell the court about your lawsuit, the trustee can argue that you didn’t comply with your duty to disclose and that all lawsuit proceeds should be distributed to your creditors. If the trustee believes that you were intentionally trying to abuse the bankruptcy system or defraud your creditors, he or she may even ask the court to withhold your discharge.
You May Be Prohibited From Pursuing the Lawsuit
If you don’t disclose your lawsuit in your Chapter 13 bankruptcy, the court can hold that you are prohibited from pursuing the claim. See In re Flugence, No. 13-30073 (5th Cir. Oct. 4 2013). This is commonly referred to as judicial estoppel. The reasoning behind judicial estoppel is that by failing to list the claim in your bankruptcy, you are impliedly representing that you have no such claim.
In general, you will be estopped from pursuing the lawsuit if the court finds that:
- your current legal position is inconsistent with your prior position (for example, you are asserting that you have a claim in your lawsuit but you did not disclose it in bankruptcy)
- the court accepted your original position, and
- you obtained an unfair advantage and didn’t act inadvertently (without intention of wrongdoing).
Many debtors claim that they acted inadvertently because they didn’t know they had to disclose the lawsuit to the bankruptcy court. But this is generally not a valid defense to judicial estoppel, even if you told your attorney about the lawsuit and your attorney didn’t inform you of your duty to disclose.
When determining whether a debtor acted inadvertently, most courts only consider:
- whether the debtor knew about the claim or the facts underlying the claim, and
- whether the debtor had a motive to conceal the claim.
But in a recent case, the Ninth Circuit Court of Appeals held that the debtor’s subjective intent should also be considered (in addition to the debtor's actions) if the debtor reopens his or her bankruptcy to correct the error and disclose the claim. See In re Ah Quin, No. 10-16000 (9th Cir. July 24, 2013). This means that if you live in a district under the jurisdiction of the Ninth Circuit, you may have a better chance of arguing against judicial estoppel because proving a subjective intent to deceive is typically more difficult to do.
Talk to a Bankruptcy Attorney
If you file a lawsuit or acquire a cause of action during your Chapter 13 bankruptcy, what you do next can affect both your bankruptcy and your lawsuit. In addition, how your lawsuit will affect your bankruptcy will usually depend on the rules in your jurisdiction. For these reasons, talk to a knowledgeable bankruptcy attorney in your area to learn about your options.