By John Lee
Failing to list your personal injury claim on your bankruptcy schedules can lead to a total loss of your personal injury claim. The debtor in bankruptcy has a duty to list all of his assets, including potential or contingent assets. When a debtor files for bankruptcy most of his assets become part of the bankruptcy estate and may be administered by the Trustee. The Trustee will abandon his interest in any assets that the debtor properly exempts, including personal injury claims. The debtor may amend his schedules to claim his exemptions any time up until the bankruptcy court closes his case. Upon the court closing the bankruptcy case, the debtor can no longer amend his schedules without first getting court approval, which in many cases is difficult to obtain.
An asset, including a personal injury claim, becomes part of the bankruptcy estate even if the debtor fails to list it on the bankruptcy schedules. The Trustee can only abandon assets that are listed on the schedules and that he is aware of. Therefore if the personal injury case is not listed, it can not be abandoned by the Trustee. If the bankruptcy case closes and the Trustee has not abandoned the asset, then the Trustee remains the owner of the asset and holder of the claim. That means the Trustee, not the debtor, is the owner of his personal injury case and only he can be the plaintiff in the State Court personal injury action. When the insurance company defense attorney finds out that the debtor filed bankruptcy and the asset was not listed, he may file a motion to have the State Court personal injury suit dismissed because the debtor/plaintiff is no longer the rightful owner of the claim. This is a critical point because the statute of limitation to file a personal injury case is only two years. If your personal injury case is dismissed because the Trustee is the rightful owner of the personal injury claim, then you may miss your filing deadline attempting to fix the mistake in bankruptcy court.
If the debtor/plaintiff leaves the personal injury suit off his schedules the defense attorney for the insurance company may also raise the defense of Judicial Estoppel. Judicial Estoppel is a legal doctrine that prevents a person from claiming two contradictory positions under oath. If the debtor/plaintiff successfully completes his bankruptcy with his schedules showing no personal injury claim, then the debtor will not be allowed to assert that he has a personal injury claim in State Court. The debtor is required to sign his bankruptcy schedules under oath. If he signs his schedules under oath stating that he has no personal injury claim, then how can he pursue a personal injury claim after filing bankruptcy? The debtor can not state, under oath, in one court that he is owed no money for a personal injury suit; and then claim he is owed money in a State Court tort action. The debtor may be placed in the situation where he has to answer the question: when were you lying, then or now? In this situation, the insurance defense lawyer may ask the State Court to dismiss the personal injury suit based on Judicial Estoppel.
Even if you win your personal injury suit in State Court, you still may not be able to keep the settlement award. If you receive an award for a personal injury suit that you did not list and exempt on your schedules, the Trustee may reopen your case and take the award for the benefit of your creditors. The Bankruptcy Courts have held that a debtor does not have the right to amend his schedules without court approval after the case is closed. Typically, a case where the debtor simply “forgot” to list his personal injury settlement is not one where the bankruptcy court would grant leave to amend. If you are not granted leave to amend your schedules to claim your exemption, then the Trustee will be entitled to the entire personal injury settlement award.
So far everything seems pretty straight forward, right? List your personal injury claims on your schedules so you can exempt them. But what about the personal injury case that you legitimately don't know about? You might ask, how can one not know they were injured?
Consider the case where a woman has surgery in 2012 and then files bankruptcy in 2013. Her Bankruptcy case is completed and closed, and then, in 2014 she learns that the doctor left a medical instrument inside her by mistake. The injury occurred prior to her filing bankruptcy but she did not learn of it until after the bankruptcy was closed, so she did not list and exempt it on her schedules. Can she still maintain a medical malpractice suit against her doctor? If she is successful in her malpractice claim can she keep the award, or does the Trustee get it because she did not exempt it? Is it fair for her to loose her malpractice settlement because she did not list it on her bankruptcy schedules?
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In 2003 the United States Bankruptcy Court in Kansas ruled on this exact issue. The Court ruled in In Re: Smith (293 B.R. 786) that the settlement award was not an asset of the bankruptcy estate because the debtor did not discover the cause of action existed until after the bankruptcy case was closed. The Kansas Bankruptcy Court relied on State Law which holds that a cause of action does not exist, and therefore the statute of limitations does not begin to run, until the plaintiff discovers, or reasonably should have discovered, the causation of the injury. Since Smith did not realize the cause of her injuries until well after the bankruptcy was closed, the asset never came in to the estate and she was able to keep the settlement award.
In 2012 the Bankruptcy Court in Georgia found a very similar fact pattern, where the debtor had been injured prior to the bankruptcy but did not discover the injury until after the bankruptcy case was closed. In the case of In Re: Webb (484 B.R. 501) the court ruled that the settlement award was an asset of the bankruptcy estate because the bankruptcy court was not bound by state laws that allowed for the statute of limitations on a cause of action to begin accruing on the date of discovery. In Webb the Trustee was allowed to administer the settlement because it was not listed and exempted in the original bankruptcy filing. However, the bankruptcy Judge pointed out that the debtor may still be able to claim his personal injury exemptions and leave nothing for the Trustee. Depending on the size of the settlement and amount of personal injury exemption, the debtor in Webb may still be able to keep his entire personal injury settlement.
In the 2009 case of In Re: Wilmoth (412 B.R. 791) the Bankruptcy Court in Richmond, Virginia held that a debtor was not implicitly granted the right to amend schedules and claim exemptions simply because the Trustee reopened the case. In Wilmoth the Court found that the debtor was aware of the personal injury case prior to filing bankruptcy and simply left it off the bankruptcy schedules. The court held that a Trustee may open the case to administer assets but the debtor would have to show good cause to be allowed to amend schedules. The court went on to explain that the debtor would have to demonstrate “excusable neglect” for failure to amend before the bankruptcy case was closed. In this case the Court denied the debtors motion to amend schedules to claim his exemption in the personal injury settlement funds.
If you forget to list your personal injury case on your bankruptcy schedules, the Bankruptcy Court will, most likely, not allow you to amend your schedules after your case is closed. When your personal injury case settles, the Bankruptcy Trustee will take the award because it is an asset of the bankruptcy estate even though it was not listed and you will not be permitted to file amended schedules claiming your exemptions. If you did not discover the injury or cause of action until after your bankruptcy case is closed, you may be able to rely on In re: Smith to prevent the asset from becoming part of the bankruptcy estate. If the asset becomes part of the bankruptcy estate you may be able to rely on In re: Webb or In Re: Wilmoth to amend your schedules to claim your exemptions.
If you were in a car accident and failed to list the injury on your bankruptcy schedules it is unlikely you will be able to claim that you were unaware of your injuries and be permitted to amend your schedules after the case is closed. Typically, the undiscovered personal injury cases are related to mass tort or class action suits where the debtor took a drug or used a medical device that later turned out to be defective. In cases like this the debtor can legitimately argue that the injury was not discovered until a doctor diagnosed the injury as being related to the medical devise or drug that was taken years earlier. The requirement to list all potential assets or claims does not end with personal injury settlements; the debtor must also list any other class action suits, mass torts, civil actions, consumer protection claims, employment discrimination claims, civil action claims or any other then existing cause of action the debtor may wish to maintain after filing bankruptcy.
If you are preparing to file for bankruptcy, make certain that you list all of your assets, including any cause of action to which you may be party to in the future. Failure to list and exempt the personal injury claim could lead to the personal injury case being dismissed in State Court or could lead to the Chapter 7 Trustee taking the settlement for the benefit of your creditors. Filing bankruptcy without an attorney can easily lead to the loss of tax refunds, homes, automobiles and future personal injury claims. If you are considering filing a bankruptcy, you should consult with the experienced bankruptcy attorneys at John W. Lee, PC.
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