Potential legal claims that you may have (even if you have not yet filed a lawsuit) are considered assets in bankruptcy. This means that you must list them in your bankruptcy papers. For example, if you think you have a discrimination claim against your employer, were involved in a car accident, or have a business contract dispute, you must disclose those in your bankruptcy papers, even if the claim might never amount to anything.
If you fail to disclose a possible legal claim, you can run into problems in your bankruptcy and a judge may also prohibit you from bringing a lawsuit or otherwise pursuing the claim later on, even if your bankruptcy case is over.
Disclose All Potential Legal Claims in Your Bankruptcy
You are required to list all potential claims that you have (even if they are contingent or unliquidated) on Schedule B of your bankruptcy papers. A contingent claim means that it depends on the occurrence of a specific event in the future. A claim is considered unliquidated if its exact value has not yet been determined.
Even if you think that you will not be filing a lawsuit to pursue the claim, you need to disclose it to the court. This allows the bankruptcy trustee to investigate your claim further and determine whether he or she will pursue the claim for the benefit of your creditors.
Common examples of possible legal claims you might have include:
- claims against your former employer
- car accident or other personal injury claims, and
- claims for breach of contract.
What Happens If You Don’t Disclose Your Potential Legal Claims?
If you don’t disclose your possible legal claims in your bankruptcy, the trustee can argue that you committed bankruptcy fraud by omitting assets from your bankruptcy schedules. If the court determines that you intentionally concealed the claim, it can rule that any proceeds obtained from the lawsuit should go to your creditors (even if you could have exempted them). Depending on the severity of the circumstances, hiding assets in bankruptcy can also lead to denial of your discharge and criminal prosecution.
In addition, by not listing a potential claim in your bankruptcy, you can also lose your right to pursue it down the line. If you don’t list your claim in your bankruptcy papers and you later bring a lawsuit, the defendant in the lawsuit can argue that you should be prohibited from pursuing that claim by the doctrine of judicial estoppel.
Under judicial estoppel, a court can bar you from pursuing a legal claim if:
- you asserted inconsistent positions in your bankruptcy and the current lawsuit (the defendant would argue that by not listing the claim in your bankruptcy, you essentially represented that you had no claim; to bring a lawsuit on that claim would therefore be inconsistent with your previous position), and
- you gained an unfair advantage by not disclosing the claim in your bankruptcy but still asserting it in a separate lawsuit afterwards.
Valuing Your Legal Claims
In most cases, you won't yet know how much your claim is worth because you have not yet litigated the issue and obtained a judgment. In general, you are expected to provide an estimated value in your bankruptcy papers if it’s reasonable to do so under the circumstances. Depending on the type of claim you have, you may have a good idea of what your damages are. Also, if you talked to or hired an attorney, he or she may have told you how much your case is worth or the amount of damages the lawsuit will seek.
In general, it’s not a good idea to underestimate the value of your claim. If you can’t reasonably estimate what the claim is worth, many courts allow debtors to list the value as unknown in their schedules. But be aware that depending on the rules in your jurisdiction, the value you assign to a potential claim in your bankruptcy schedules can affect:
- whether you will be estopped (barred) from pursuing the claim (the defendant may make this argument if you significantly undervalue your claim in your bankruptcy)
- the amount of recovery you will be limited to in the lawsuit (the defendant may argue that your recovery should be limited to the amount you claimed in bankruptcy), and
- how much of the proceeds you may be able to claim as exempt.
Talk to a Bankruptcy Attorney
Because how you list and value your potential legal claims can significantly affect your bankruptcy and your subsequent lawsuit, talk to a knowledgeable bankruptcy attorney in your area to learn more about how to disclose your possible claims in bankruptcy.