Bankruptcy is one area of the law that can reach far and wide and can impact numerous other areas of law. It is not uncommon for a bankruptcy client to also have another lawsuit ongoing in which they are the plaintiff. While clients are allowed to proceed against other parties while in a case, they are required to disclose these potential or current lawsuits as an asset. If they are represented by counsel then they are required to have their outside counsel approved by the bankruptcy court.
LAWSUITS FILED BEFORE A CHAPTER 13 CASE IS FILED
If the basis for the lawsuit happened before a client filed for Chapter 13 bankruptcy then they should include the potential claim in their bankruptcy schedules. A potential legal claim or lawsuit (even if not filed yet) is an asset, just like a home, car, and bank accounts.
Many times, clients are not aware that they have a legal claim when they file for Chapter 13 bankruptcy, even if the event already happened. If this happens, they must disclose the claim to the court when they learn of it by amending their Chapter 13 schedules. If they don’t, they could later lose their right to collect any payment for the claim. Most of the time, before the other side will settle a lawsuit, they will ask if the plaintiff has ever filed for bankruptcy. If they check and see that a plaintiff purposely left off the claim in their case then they can ask the court to dismiss the plaintiff’s lawsuit.
LAWSUITS FILED DURING A CHAPTER 13 CASE
If a client files a lawsuit during their Chapter 13 bankruptcy case, they must disclose this fact to the court immediately. Bankrutpcy counsel will need to amend the client’s bankruptcy schedules to make sure this is listed as an asset. If a claim settles during a case then those proceeds could be required to be paid into the Chapter 13 case. Clients will need to review this with their attorney to see what their case requires.
THE BANKRUPTCY COURT MUST APPROVE ANY LEGAL SETTLEMENT
Because the lawsuit is part of the bankruptcy estate, the bankruptcy court will have to approve any settlement a client proposes to make, particularly to ensure that the attorneys’ fees and costs in the lawsuit are reasonable. Once outside counsel has a proposed settlement agreement in place that all parties have agreed to, bankruptcy counsel will file a Motion to Approve Settlement so that the trusee and the court can review the terms.
LAWSUITS IN CHAPTER 7 CASES
Chapter 7 clients are usually only in their case about 4-5 months. Any lawsuits or potential claims also need to be reflected on the schedules just as required above. Failure to list a potential claim or asset will result in the disallowance of the claim.
While clients can exempt a portion of any potential lawsuit proceeds, the Chapter 7 may keep a case open if they believe that proceeds may be available to unsecured creditors even after the client has taken their exemption. The Chapter 7 trustee typically allows current counsel to continue with the case and once it settles will work with the attorney to ensure approval of the settlement and disbursement of funds.
Our attorneys always review this issue with our clients and let them know that the best rule of thumb for clients while in a bankruptcy is to ASK if they have any questions. If you have any questions about lawsuits during a bankruptcy case, filing for bankruptcy in Georgia, or any other matter you can always reach us at [email protected]
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