Considering Filing Bankruptcy? Be Sure To Preserve Your Claims Against Creditors

When you file for bankrupcty, you are required to disclose all of your assets and liabilities. Most people think of assets as things (tangible or intangible) that they currently own that are worth money. The U.S. Bankruptcy Code says differently. An asset for purposes of bankruptcy includes lawsuits that you could bring against someone, but haven't yet brought. 

In most cases, you will be aware if you have lawsuits against a creditor or anyone else when you file for bankruptcy. So long as you disclose those potential lawsuits, you will be free to bring them in the future so long as 1) the bankruptcy trustee doesn't pursue the claim and 2) the statute of limitations has not run. If your trustee doesn't pursue a claim, then the claim will be abandonded by the trustee. You are then free to pursue it. 

So why do you have to disclose the claim? Because it is technically property of your bankruptcy estate and can be liquidated for the benefit of your creditors. Unless you have an especially lucrative lawsuit, most trustees will abandon your potential lawsuits at the end of your case. If you don't disclose those potential claims, then you cannot sue on them at a later date. This is because those claims are still property of the bankruptcy estate--any potential financial windfall should benefit your creditors, not you. 

In the case of Tyler v. DH Capital Management, Inc., the U.S. Court of Appeals for the Sixth Circuit held that a debtor who failed to disclose a potential claim in his Chapter 7 bankruptcy could not pursue that claim post-discharge. What makes this case noteworthy is that the debtor was not aware of the claim because he was unaware that he was being sued by a debt collector.

DH Capital Managment had filed a lawsuit against Tyler three months before Tyler filed for bankruptcy. However, DH Capital Management had not yet served a summons on Tyler when he filed his bankruptcy. The court held that pre-petition claims are rooted in the violation. If the violation occurred pre-bankruptcy, then the claim existed pre-bankruptcy and must be listed as an asset. 

But how can a claim that the debtor doesn't know about be an asset? The court noted that bankruptcy courts have held that the debtor's knowledge is not a factor--if the cause of action arose before the bankruptcy was filed, then the claim becomes an asset of the bankruptcy estate. 

So what does this mean for people filing bankruptcy? 

1. Make sure that you pull your credit before filing. 

In the Tyler case, the plainitff wasn't aware that he'd been sued because he hadn't yet been served with a summons. However, creditors may be reporting on your credit report before they sue and before you receive a summons. Checking your credit report may reveal creditors you didn't know about. 

2. Make sure that you check the online docket of your local courts (if available)

Many counties in and around Chicago have online docketing systems that the public can access. Your attorney should have access to these systems as well. You may discover that there are cases filed against you before the sheriff has had an opportunity to serve you. 

3. List potential claims, even if they may ultimately lead to nothing

If anything, the Tyler case demonstrates the truth of the adage, "better safe than sorry." As a general rule, if you think that you might be able to sue a creditor in the future, then list a potential claim in your bankruptcy. If the trustee doesn't think that it is lucrative, then the claim will abandoned and you'll be able to bring it post-discharge. It may be that nothing comes out of your potential claim. However, it's better to list it and not sue than to not list it and find your claim barred. 

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