If you have a pending lawsuit, you must disclose it as an asset in your bankruptcy. If you don’t list your lawsuit in your bankruptcy papers, you can get in trouble for hiding assets. In addition, the court may decide that you are estopped (prohibited) from pursuing the lawsuit. Read on to learn more about what happens if you fail to list a pending lawsuit in your bankruptcy papers.
You Must Disclose Your Pending Lawsuit
Your pending lawsuit is considered an asset in bankruptcy. This means that you are required to disclose it on your bankruptcy papers so that the bankruptcy trustee can determine whether any of the potential proceeds should be paid to your creditors.
In general, if you can exempt the value of your lawsuit, the trustee will not go after the proceeds you recover. (Learn more about how you can use bankruptcy exemptions to protect your property.) But if you can’t exempt the entire value of your claim, the nonexempt portion may be fair game for your creditors.
What Happens If You Fail to List Your Pending Lawsuit?
If you fail to disclose your pending lawsuit, it can have negative consequences for both your bankruptcy and your lawsuit.
You Can Get in Trouble for Hiding Assets in Bankruptcy
When you file for bankruptcy relief, you are required to disclose all of your property on your bankruptcy schedules. Intentionally omitting an asset is considered bankruptcy fraud. If you don’t list your pending lawsuit in your bankruptcy papers, the trustee can argue that all proceeds should go to your creditors (even if you would have been able to exempt a portion of the potential recovery).
Further, if the trustee alleges that you intentionally committed bankruptcy fraud, he or she can object to your discharge or even refer your case to the U.S. Trustee for criminal investigation.
The Court Can Prohibit You From Pursuing Your Lawsuit
If you fail to list your pending lawsuit in your bankruptcy papers, the court can also determine that you are prohibited from pursuing it (referred to as judicial estoppel). In re Queen, Nos. 11-8090, 11-8098 (10th Cir. Aug. 20 2013). The way judicial estoppel works is that if you don’t list your lawsuit in your bankruptcy, you are essentially representing to the court that you don’t have a valid claim.
When determining whether you should be estopped from pursuing the lawsuit, most courts consider:
- whether your current position is inconsistent with your former position (for example, you are alleging in your lawsuit that you have a valid claim but you didn’t list it in your bankruptcy papers)
- whether you succeeded in convincing the court to accept your prior position
- whether you gained an unfair advantage, and
- whether you made a mistake or acted inadvertently.
In general, claiming that you made a mistake because you didn’t know you had to disclose your lawsuit is not a defense to judicial estoppel (even if you informed your attorney about the lawsuit and he or she told you that you didn’t have to list it).
If you claim mistake or inadvertence as a defense, most courts only look at:
- whether you knew about the lawsuit or the facts underlying the claim, and
- whether you had a motive to conceal the lawsuit.
But if you reopen your bankruptcy to disclose the lawsuit, the Ninth Circuit Court of Appeals recently held that courts should take into account your actual intent as well. In re Ah Quin, No. 10-16000 (9th Cir. July 24, 2013). Because it’s more difficult to prove a debtor’s actual intent to deceive (rather than to just determine whether there might have been a motive), this means that debtors who reside in a district subject to the Ninth Circuit’s jurisdiction may have a better shot at defending a judicial estoppel claim.
Talk to a Bankruptcy Attorney
Filing for bankruptcy while you have a pending lawsuit can affect what happens to the proceeds you recover and whether you may be judicially estopped from pursuing the claim if you don’t list it in your bankruptcy. For these reasons, talk to a knowledgeable bankruptcy attorney in your area to learn more about what can happen if you don’t list your pending lawsuit in your bankruptcy.