When a Debtor files for bankruptcy relief, he or she must disclose all actual and potential property rights, even if he or she believes the property rights have no value. The general rule of thumb is “disclose, disclose, disclose.” Debtors rarely, if ever, get in trouble for disclosing assets too much, whereas failing to disclose something can lead to severe consequences.
Because of the need to disclose all actual and potential property, a debtor also has an obligation to disclose whether he or she has sued anybody or might have the right to sue anybody, including on account of a personal injury. The right to sue is considered to be an interest in property.
When a person fails to disclose a potential right to sue, such as for a personal injury, and then that person later tries to pursue the suit in a separate proceeding (including after the case is closed), most courts will bar the person from proceeding with the suit under the doctrine of “Judicial Estoppel.”
Judicial Estoppel precludes a party from taking a position in a case that is contrary to a position taken in an earlier proceeding, including a bankruptcy case. If a person fails to disclose a potential personal injury claim in their bankruptcy schedules, courts have interpreted the failure to disclose as the same as stating that the asset does not exist.
An example of Judicial Estoppel is Berge v. Kuno Mader and DMG America, Inc., which was decided in 2011. In that case, Shirley Berge, was involved in an accident with a car owned by DMG America, and driven by a DMG employee. One month before the accident, Ms. Berge filed for bankruptcy under Chapter 13. Her case was later converted to Chapter 7.
After her case was converted, Ms. Berge did not amend her Bankruptcy Schedules to include the potential personal injury suit. She was then granted a discharge under Chapter 7 and started to pursue the claim. The defendant in the personal injury suit learned about the bankruptcy filing, and alleged in the underlying suit that Ms. Berge was judicially estopped from pursuing her personal injury claim because it was never disclosed in the bankruptcy. The court agreed, and concluded that Judicial Estoppel applied to bar the suit, because the prior oaths and documents Ms. Berge provided to the Bankruptcy Trustee never disclosed the potential personal injury claims.
The takeaway from this … If you are thinking about filing for bankruptcy relief, you should realize that you have to disclose in full all rights that you might have to sue for personal injuries and other wrongs that may have been committed against you even if you do not intend to pursue the claim or think that it has no value.