Causes of action, or lawsuits, the Debtor may have against other persons are assets which must be disclosed on a bankruptcy petition. Often times the asset is exempt or partially exempt, but Section 521(a) of the Bankruptcy Code requires that all assets, tangible or intangible are property of the estate.
Because people don’t often think of lawsuits as assets per se, like they think of a car for example, they often forget to list the lawsuit on their bankruptcy. A debtor who forgets or intentionally omits a lawsuit where they may have a right to recovery money, risks two unpleasant consequences.
First, the Debtor may loose standing to pursue the lawsuit, as the trustee may retain the right to bring the suit on behalf of the bankruptcy estate even years later. This may happen where the debtor forgets to list the lawsuit, doesn’t admit or recall it at her 341 meeting of creditors when asked by the trustee and then tries to pursue the case years later.* Defense lawyers, such as insurance company lawyers looking at liability for an auto accident for example, can and will find out if the debtor has filed bankruptcy, and can and will find out if the lawsuit was listed as an asset of the estate. To say the least this may compromise the debtor’s lawsuit.
Secondly, in an extreme case, the Bankruptcy Court may deny a debtor a discharge for lying on their bankruptcy Petition and Schedules. The bankruptcy Code exists to provide relief to honest but unfortunate debtors, and where it is proven that a petitioner has lied to the court, even in, and maybe especially in his or her Court filings, then that debtor can be denied the protection of the Courts.
My bankruptcy forms ask specifically about lawsuits, both against the debtor and lawsuits that the debtor may have against others. This is another area where experienced counsel can really make a difference in a bankruptcy case.
*Even after a bankruptcy case is closed, causes of action or any asset that is undisclosed remain property of the bankruptcy estate, unless abandoned by the trustee. It has been decided in numerous cases that a trustee cannot abandon property unless it was disclosed.