Failure to disclose all assets can be expensive
The purpose of a bankruptcy case is to allow a debtor to discharge some or all of their debts while allowing a bankruptcy trustee and the court to examine the debtor’s finances and to pay any non-exempt assets to the creditors.
In this proceeding, the debtor obtains a significant benefit, the discharge of their debts, but to receive this benefit, they must comply with the requirements of the bankruptcy statutes and courts.
One of the requirements is complete disclosure of the debtor’s financial records to the trustee and court. It is this disclosure that permits them to evaluate the debtor’s financial condition, determine that all of the eligibility requirements are met and that the creditors can receive any available non-exempt assets
A complete disclosure of you assets and liabilities
The disclosure of a debtor’s finances is made in the schedules submitted when the file a Chapter 7 or a Chapter 13. With a Chapter 13, there is the additional filing requirement of a Chapter 13 plan, which specifies the allocation of the debtor’s income, and functions like a budget for the debtor during the plan period.
If a debtor’s income varies during the 3 to 5 years of most plans, the debtor is obligated to amend their plan. This would be necessary if they lost a job or suffered a reduction in income or changed jobs and received an increase in income.
Among the other types of assets a debtor would need to disclose are lawsuits. Because monetary damages paying compensation to a debtor is considered an asset, as it would potentially allow a debtor to make some additional type of payment to a creditor, it is necessary that the creditors, trustee and the court know of any potential compensation.
Estoppel means stop
One debtor in the Fifth Circuit found out the hard way the consequences of nondisclosure when they suffered a personal injury after they had filed their Chapter 13. Because of the continuing duty to disclose new income or assets, when they suffered the injury a few months after filing, they should have amended their Chapter 13 plan to show their lawsuit.
They did not, and near the conclusion of their Chapter 13, the defendant in their personal injury lawsuit filed a motion to dismiss the personal injury case because the debtors had failed to disclose the personal injury lawsuit in their bankruptcy.
This is because of the concept known a judicial estoppel. Estoppel works to prevent a litigant from saying one thing in one court and something else in another court. Because the debtor failed to disclose the personal injury lawsuit as an asset in the bankruptcy case, the argument goes, they were saying to the bankruptcy court that they had no claim on that issue.
They could not then go into federal district court and file a claim on that issue. They appealed their dismissal, but the court of appeals agreed and found that the debtors were estopped from litigating the personal injury claim.
This seems a hard ruling and it is, but it reinforces the need to understand all of the requirements of a bankruptcy case. Ironically, the personal injury lawsuit may still survive if the court will allow the bankruptcy trustee to be substituted as a party, as creditors would likely still be interested in the proceeds of such a lawsuit.