What happens if I hide a lawsuit during my bankruptcy?

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Stephen Dunne, Esq.

Philadelphia bankruptcy, credit report, and debt collection abuse attorney

Wondering about failure to disclose and delayed disclosure?
Picture of Stephen Dunne, Esq.

Stephen Dunne, Esq.

Philadelphia bankruptcy, credit report, and debt collection abuse attorney

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The Bankruptcy Code, 11 U.S.C. § 521, requires debtors to disclose any potential claims during the bankruptcy proceedings.  Section 521 lists various duties of a debtor.  All debtors must file a schedule of assets and liabilities and a statement of financial affairs.

The filing of a bankruptcy petition creates a bankruptcy estate, which consists of “all legal or equitable interests of the debtor in property” as of the commencement of the case. In re Allen, 768 F.3d 274, 281 (3d Cir. 2014) (quoting 11 U.S.C. § 541(a)(1)).

The scope of 11 U.S.C. § 541(a)(1) is broad, and it includes all kinds of property, including possible causes of action. Id. The duty to disclose applies to all pre-petition claims. See 11 U.S.C. § 521(1) (“the debtor shall file…a schedule of assets and liabilities…and a statement of the debtor’s financial affairs…”); Collier on Bankruptcy, 15th Edition Rev. §521.06[3][a] (“Possible causes of action belonging to the debtor should be listed, even if the likelihood of success is unknown”).

Once an estate is created, the trustee has sole and exclusive authority to pursue claims on behalf of the estate. See In Re Dionisio, 2003 U.S. App. LEXIS 12432, at *5 (3d Cir. 2003); See also in re Truong, 2006 Bankr. LEXIS 4525, at *11 (Bankr. D.N.J. May 3, 2006). (“[A] trustee is granted complete authority and discretion with respect to the prosecution and defenses of any litigation of the debtor’s estate.”). For a debtor to regain standing, the trustee must abandon the claim, whether voluntarily or pursuant to an Order of Court. 11 U.S.C. § 554(a)-(b).

Failure to Disclose

A non-inadvertent failure to disclose a cause of action may warrant the application of judicial estoppel precluding debtor from bringing the action. United States ex rel. Hebert v. Transport Admin. Servs., 260 F.3d 909 (8th Cir.).

Delayed Disclosure

Where the debtor made the court and trustee aware of a potential civil claim against the defendant before the bankruptcy case closed, even though the claim was omitted  fro the plaintiffs’ bankruptcy schedule form, it was inappropriate to find that judicial estoppel barred the debtor’s claim after bankruptcy. Eubanks v. CBSK Fin. Grp., Inc., 385 F.3d 894 (6th Cir. 2004).

Lack of Standing

A debtor discovered that a national debt collection agency, Midland Funding reported a debt she had incurred to a credit-rating agency. The debtor mailed a letter to Midland Funding disputing the debt. In September 2013, Midland Funding re-reported the debt to the credit-rating agency. On October 8, 2013, the debtor examined her credit report and found that Midland Funding had failed to report the debt as “disputed by consumer,” to the credit-rating agency.

On October 31, 2013, the debtor filed for bankruptcy and received a discharge of her debts on February 7, 2014.

On September 16, 2014, the debtor filed a Complaint in state court alleging that Midland Funding’s failure to report the debt as “disputed by consumer” to the credit-rating agency entitled her to relief under the Fair Debt Collection Practices Act (“FDCPA”). 

Because she filed for bankruptcy after October 8, 2013, the FDCPA claim is a pre-petition claim. Thus, the FDCPA claim became part of the bankruptcy estate on October 31, 2013, when debtor filed for bankruptcy. Because she failed to list the claim as an asset on her bankruptcy schedules, it remains part of the bankruptcy estate.  Unscheduled property can never be abandoned from the bankruptcy estate.

The debtor lacks standing to pursue her claim as only the Trustee has exclusive authority to dispose of our control property of the bankruptcy estate. In this case, the defendant’s motion to dismiss for lack of standing under Federal Rule of Civil Procedure 12(b)(1) was granted because the debtor did not have any standing to bring this cause of action. See Barris v. MIDLAND FUNDING LLC, Dist. Court, D. New Jersey 2015.

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