Undisclosed Claims & Judicial Estoppel

If you needed another reason to disclose assets to your bankruptcy attorney, here’s one.

Patricia Plaintiff is involved in an auto accident.  She is thinking about suing the other driver for damages.  She is also planning to file for bankruptcy.  Worried that the money she would be entitled to from the accident would be seized by the bankruptcy trustee, she delays filing her lawsuit in the hopes that her bankruptcy attorney (and everyone else involved in the administration of her bankruptcy case) does not learn about the asset.

Patricia Plaintiff made a huge mistake by keeping her potential claim a secret.
  1. She wrongly assumed that the trustee would have a claim to the money.  Federal exemptions currently protect more than $20,000 for a personal injury claim, plus any wildcard exemption that the debtor has remaining.  Wisconsin exemptions can protect the first $50,000 of a personal injury claim.
  2. Because she omitted her contingent asset, she will most likely not be allowed to claim her exemptions later, if and when the asset is discovered.  The exemption she would otherwise have been entitled to can be denied for failure to disclose the asset initially.
  3. Because she did not list the asset on her bankruptcy schedules. she could be barred from filing the lawsuit later due to judicial estoppel, which precludes a party from taking a position in a legal proceeding (the personal injury lawsuit) that is inconsistent with a position the party took in a prior legal proceeding (the bankruptcy case).  In other words, by omitting her personal injury claim, she basically testified to the bankruptcy court that she has no personal injury claim.  She cannot then, later, go into civil court and assert that she has a personal injury claim.

Contingent assets are assets that a person has a future interest in, but does not presently have possession over.  A contingent asset might be of unknown nature or value.  Examples of contingent assets include personal injury claims, breach of contract claims, tax refunds, and inheritances.
Nevertheless, the existence of a contingent asset is still a valid legal interest, even if the value of such an asset is yet to be determined.  The uncertainty of a contingent asset does not excuse a debtor from listing the potential on his bankruptcy schedules.  Care should be taken to disclose as much information about the potential claim as possible, so the trustee can make a determination on the asset.  Sometimes, it is necessary to keep a bankruptcy case open for a long period of time so that the nature and value of the asset can be determined (this does not delay the issuance of a discharge).  Other times, the trustee can predict that the asset will not be worth pursuing, and close the case despite not knowing for certain the ultimate value of the asset.

Judge Shapiro

Today is the Annual Bankruptcy Update in Milwaukee.  After conferences like these, I usually have some new things to talk about, but since I post on Wednesday mornings, I’ll have to wait until next week to share news and developments in bankruptcy law.
So today, I’d simply like to tip my hat to Judge James E. Shapiro, who – after serving for 32 years on the bench – is retiring from the U.S. Bankruptcy Court for the Eastern District of Wisconsin at the end of this year.  Although I have never had the opportunity to appear in front of Hon. Shapiro (he was assigned cases exclusively from southeastern Wisconsin during my entire career to date), he will still be sorely missed.

Serial Filings & the Effect of Conversion

Some of my clients have to file a Chapter 13 Bankruptcy because they filed a previous Chapter 7 Bankruptcy within the past eight years, and are ineligible for a Chapter 7 discharge.  Very often in these Chapter 13 cases, which last three to five years, at some point during the case, their prior bankruptcy now occurred more than eight years ago, prompting the inevitable question: “Can I convert to Chapter 7 now?”
The answer, of course, is no.  But let’s talk about why.
To prevent abuse of the system, the bankruptcy code limits discharges in serial bankruptcy cases to situations where a certain period of time has elapsed – the period of time depending on which chapters of bankruptcy are being considered.
The most common time limit is between two consecutive Chapter 7 bankruptcy cases.  If you file a Chapter 7 Bankruptcy, you cannot get another Chapter 7 discharge for eight years.
If you filed a Chapter 13 Bankruptcy first, you cannot get a Chapter 7 discharge for six years (with exceptions, which I’m not going to get into for purposes of this discussion).
If you filed a Chapter 7 bankruptcy first, you cannot get a Chapter 13 discharge for four years.  If you filed a Chapter 13 bankruptcy first, you cannot get another Chapter 13 discharge for two years (which is rare, since most Chapter 13 cases run for 3-5 years anyway).
A couple of things to note.  First, of all, you do not need to be eligible for a discharge to file under Chapter 13 (meaning you can file Chapter 13 virtually anytime – again with certain restrictions and caveats).  I don’t think there is a bar to filing Chapter 7 if you’re ineligible for a discharge, but it’s a colossal waste of time and money, and nobody does it.
Second, when measuring the applicable time period (2, 4, 6, or 8 years), the relevant dates to consider are the date your last bankruptcy case was filed with the court and the date your next bankruptcy case will be filed with the court.  Simplified: filing dates control this issue.
However, the discharge (which occurs months (Chapter 7) or years (Chapter 13) after a bankruptcy case is filed) does come into the equation, and this generates a source of confusion.  And this is where conversion comes in.
Let’s say that you filed Chapter 13 bankruptcy on October 17, 2005, completed it, and received your discharge.  You would be eligible to file Chapter 7 anytime after October 17, 2011 (6 years later).
But what if, instead, you filed Chapter 13 bankruptcy on October 17, 2005, but converted to Chapter 7 on October 17, 2007 and received your discharge on December 25, 2007?  Are you still eligible to file a Chapter 7 case on October 18, 2011?
The answer is no.  The date of conversion and the date of discharge are irrelevant.  We still look to the original filing date of October 17, 2005.  However, we look at the TYPE of discharge you received.  In this example, the person received a Chapter 7 discharge.  It is therefore as though the person filed a Chapter 7 case on October 17, 2005, and accordingly, he cannot refile a Chapter 7 until 8 years later, on October 17, 2013.
Sound confusing?  It sort of is, but it can be boiled down pretty simply.  The law doesn’t care what chapter you originally filed under – it cares what chapter you ultimately received your discharge under, and the date your case was originally filed.

File date to file date, but look at the type of discharges received.  7 to 7, 8 years; 7 to 13, 4 years; 13 to 7, 6 years; and 13 to 13, 2 years.

Using this logic, you can understand why you can’t convert a case from Chapter 13 to Chapter 7 once your eight years have passed.  In this example, the debtor files and receives a discharge under Chapter 7 on October 17, 2005.  Under the rules, he cannot refile a Chapter 7 until October 18, 2013.  In the meantime, the debtor gets into more financial trouble and can’t wait for 2013.  So he files a Chapter 13 case in 2011.  When October 2013 rolls around, he cannot convert to Chapter 7.  Why?  Because it would be as though he originally filed a Chapter 7 in 2011, which he was ineligible to do.
In order to get the Chapter 7 discharge, the debtor would have to dismiss the Chapter 13 case and re-file under Chapter 7.  This happens sometimes, BUT, take caution!  Remember when I said you could file Chapter 13 virtually anytime – with certain caveats and conditions?  Dismissing your Chapter 13 case and refiling Chapter 7 might not be the wise thing to do.  First of all, depending on the circumstances of your dismissal, you will most likely be barred from refiling ANY bankruptcy case for 180 days.  Not everyone is in the situation where they can afford to go 180 days without a discharge and an automatic stay.  Additionally, if your prior bankruptcy case was pending in the 365 days prior, you may be faced with an automatic stay that lasts for only 30 days, and has to be extended by the court after a showing of good faith.
P.S.  If you’re wondering why I kept referencing October 17, 2005, it’s because we are now less than a year away from the eight year anniversary of BAPCPA.  Prior to 10/17/05, there was a massive surge of Chapter 7 bankruptcy filings fueled by fear that people would either be forced into Chapter 13 or be prohibited from filing at all.  Consequently, we do expect to have a noticeable spike in bankruptcy filings a year from now when all of those people become eligible to refile under Chapter 7.  If you are not one of those people, but are struggling financially, you might want to consider visiting an attorney now before the surge.

Further tweaks to the MMMP

As I’ve blogged about several times in the past, the Bankruptcy Court for the Eastern District of Wisconsin launched a mediation program about a year and a half ago to facilitate mortgage modifications and avoid the ever-growing number of foreclosures.
Judge Kelley advised us yesterday that there will be some modifications to the program effective December 1, 2012.  Among the highlights:

  • The mediator fee will increase from $125.00 to $200.00.
  • Use of the DMM Portal will be made discretionary for creditors.
  • Procedures will be in place to eliminate unnecessary status hearings.

E-pay Update

A couple of months ago, I announced that Chapter 13 Trustee Thomas J. King would be offering an online payment option called Easy Pay.  That option is now fully available.  There is a $2.00 service charge to use it, which is comparable to the charge for a money order or cashier’s check.  The benefits would be (1) saving fuel on a trip to the bank and post office, (2) saving money on postage, and (3) payments posting a LOT faster than mailing them to the trust account in Memphis, which typically takes 7-10 days.  This is especially useful for people under a doomsday provision or late with their first plan payment.