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.