In our last post with Chapter 7 Riverside Trustee John Pringle of October 21, 2013, we discussed that Mr. Pringle asks each debtor: “Do you have any claims pending against anyone including a claim for personal injury?” This is a standard question he asks, but it is also a question that other Chapter 7 trustees will ask as well.
What if the claim is not listed in the bankruptcy petition or if the bankruptcy case is discharged and the defendant comes back to inform the Trustee? What happens in that case?
This is not a good situation for the debtor as the Trustee can then settle the lawsuit with the defendant as it could be deemed that the debtor intentionally did not tell the trustee about this potential asset. The Debtor may try to exempt or protect the potential asset after the fact. That being said, it would be difficult for the debtor then to try to exempt any proceeds from the lawsuit as the Trustee will argue that the Debtor acted in bad faith and should not receive anything from the lawsuit.
Another scenario arises when the defendant, then will offer to settle the claim with the Trustee. This settlement may be substantially less than the lawsuit is worth, but may be enough to pay off the debtor’s bankruptcy estate in full. So the debtor by not listing the potential claim in the bankruptcy petition may lose all rights to the lawsuit and any proceeds.
If you or your client have found that a claim or potential claim was not listed in the bankruptcy petition, immediately amend the petition to list the claim. This is in order to inform the bankruptcy trustee and to preserve the debtors rights and maybe the potential proceeds. Also be sure to try to exempt this asset if possible.