Debtor’s Duty to Disclose All Personal Injury and Other Claims Debtors Filed or Could File Against 3rd Party
Consider the scenario where a prospective bankruptcy debtor suffers severe injuries and may be entitled to a large recovery from those responsible for the debtor’s injuries. The debtor is considering filing for bankruptcy protection but does not realize the importance of disclosure of his pending or prospective personal injury claim and fails to advise his bankruptcy attorney about the claim. The debtor’s failure to disclose a pending prospective personal injury claim in a bankruptcy petition may prove disastrous to the debtor’s personal injury case.
Let’s review the following scenarios:
Unknown pre-petition injury exists but has not manifested itself, i.e., the prospective claim is unknown by the debtor at the time of the bankruptcy filing.
Known pre-petition personal injury claim exists at the time bankruptcy is filed, but no lawsuit has been commenced.
Pre-petition lawsuit is pending at the time a bankruptcy case is filed.
At the time of bankruptcy filing the nature of the personal injury action pending is as follows:
Lawsuit or court proceeding in the process;
Initial Disclosure of Known Pre-Petition Injury at Time the Bankruptcy Case Is Filed
The bankruptcy schedules require disclosure of all claims as follows in Schedule B, Paragraphs 33 and 34:
33. All claims against third parties, whether or not may have filed a lawsuit or made a demand for payment. Examples include, but are not limited to: Personal Injury Claims, Accidents, employment disputes, insurance claims, or rights to sue. Describe each claim.
34. Other contingent and unliquidated claims of every nature, including counterclaims of the debtor and rights to set off claims. Describe each claim
In Paragraph #9 of the Bankruptcy Petition’s Statement of Financial Affairs the debtor is required to disclose the following:
"Within 1 year before you filed for bankruptcy were you a party to any lawsuit, court action, or administrative proceeding? List all such matters, including personal injury cases, small claims actions, divorces, collection suits, paternity actions, support or custody modifications, and contract disputes.
As a part of the Paragraph #9 answer, the debtor must fill in the blank as to the status of any case whether it is "Pending, On Appeal, or Concluded."
Full disclosure of all/any pending or prospective personal injury and/or all other claims is required of debtors. This is true regardless of whether a lawsuit or other legal action has been commenced, such as an administrative action or arbitration. The requirement of full and complete disclosure is mandatory and absolute. The disclosure obligation is the same whether the claim is in litigation, arbitration, or mediation.
Bankruptcy debtors who fail to disclose their right to sue and recover for personal injury damages or for other claims possessed against 3rd parties can conceivably lose their entire right of recovery; this will depend on the amount of the personal injury or other recoveries, the amount of the debtor’s debts, and whether bad faith is exhibited can be impugned against the debtor, among other factors.
Additionally, if the debtor fails to report a personal injury or other claims which can be traced to a pre-petition event, a creditor, the Bankruptcy Trustee, or the United States Trustee may request a revocation of discharge under 1l USC Sec. 727(d)(2) if it can be shown that the failure to disclose was done in bad faith. Such action must be brought within the later of one year after the discharge or the closing of the case. Such a motion undoubtedly would involve re-opening the case and pursuing the fruits of the cause of action.
Unknown Pre-Petition Injuries/claims
Examples of these types of personal injury claim that may arise or not become known until after the filing of a bankruptcy, include pre-petition exposure to toxic or harmful substances, medical device failures, and other mass or class action tort claims. Pre-petition injuries which are unknown at the time of the bankruptcy filing are troublesome for debtors and their bankruptcy attorneys; they present a myriad of issues.
In one New York Bankruptcy case I was involved in, the debtor received his Chapter 7 discharge in 2009; then in 2021, the debtor became aware of his having a potential claim against a well-known medical facility and its prominent Dr. for inappropriate behavior (of a sexual nature) that occurred when the debtor was a teenager in the 1970s. The debtor’s cause of action against the facility and its Dr. did not even exist in 2008 when the debtor filed for Bankruptcy protection because the statute of limitations expired decades earlier; however, by an act of the New York State legislature, the statute of limitations was temporarily reopened to give victims such as the debtor the right to pursue these types of sexual misconduct related claims against the predators and their employers during 2020/2021 (over 10 years after the debtor received his Discharge).
In the above referred to case, the debtor was able to retain the full amount of his very substantial recovery without even having to file a Motion to Reopen his Bankruptcy case (we simply wrote a letter to the US Trustee explaining the situation and received approval to disperse the settlement funds to the debtor). In other scenarios where a prepetition cause of action existed at the time of the bankruptcy filing, and debtors did not know but arguably should have known about their existing claim, a conundrum exists as to whether the prepetition claim becomes property of the Bankruptcy Estate. Bankruptcy courts and federal appellate courts around the country do not uniformly agree as to whether debtors should be able to retain their full right of recovery of claims, which can be very fact sensitive and, are beyond the scope of this article.
Difference Between Chapter 7 vs Chapter 13
There is a different notice requirement if the debtor has filed a Chapter 7 or Chapter 13 case This is very important because if the cause of action arose entirely post-petition (after the filing of the Bankruptcy case) a chapter 7 debtor has no duty to disclose the claim as it is not part of the Bankruptcy Estate.
On the other hand, a Chapter 13 debtor has a duty to disclose all personal injury, as well as all other material claims which arise after the chapter 13 bankruptcy case, was filed; there is an ongoing requirement to disclose under 11 USC Section 1306. Whether Chapter 13 debtors can retain the full amount of their post-petition personal injury or other recovery is beyond the scope of this article; some Bankruptcy Courts have struggled with the effects of confirmation of a chapter 13 Plan on a debtor’s right to retain the full recovery, while others have focused on a myriad of other legal and/or factual issues.
One thing is clear, debtors do have an obligation to give notice of these claims to their bankruptcy attorney so that notice can be given to the chapter 13 Trustee and/or the Bankruptcy Court as necessary. This will help protect bankruptcy debtors from potentially being disgorged of their entire right of recovery, having their Discharge Order either denied or revoked by the Bankruptcy Court, or, at a minimum, having to deal with stressful and potentially expensive future administration of the debtor’s bankruptcy case (such as having to file a Motion to Reopen the Bankruptcy case).