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Bankruptcy Horror Stories

Bankruptcy Horror Story #1: The Lawsuit

I have practiced consumer bankruptcy law for the past 25 years. Covid-19 significantly changed society, my family, staff, and clients. It made me seriously reflect on the quality of my life. I decided to resign as Managing Partner of a 60 person law firm and open up a boutique consumer bankruptcy law firm: I am the only attorney, and I have only two staff members, who have been with me over 12 years each.

The bankruptcy court also made changes allowing attorneys and debtors to appear at their Meeting of Creditors over the telephone. This allowed me to personally appear at each hearing, as it saved hours travelling to and from the bankruptcy court and away from my office. I did not need an associate attorney to appear on my behalf, since I could attend each hearing from my office.

Since each Chapter 7 case is scheduled hourly, I was required to listen to each scheduled case during my client’s timeslot, as I did not know when my client’s case would be called. I usually am required to listen to 10-20 other attorney cases before my case is called. I prefer not to wait, but listening to all these cases has really taught me to be a better attorney and allowed me to start this Bankruptcy Horror Story blog—all these stories are based upon cases that I listen to each week, waiting for my client’s cases to be called. I call them Horror Stories, since I am astonished how many attorneys put their clients in Chapter 7 cases that have assets that can be liquidated. It is shocking how many attorneys do not adequately prepare their clients for the Chapter 7 Trustee’s questions, which many times ameliorate a Trustee’s concerns and resolve any issues.

Horror Story Number 1: The debtor files Chapter 7 and has a possible or pending lawsuit against a third party. The most common scenario is a debtor has a potential or pending lawsuit against a third party due to a car accident. A lawsuit is considered an asset of the estate and failure to list the lawsuit can result in the lawsuit being dismissed. A debtor can exempt approximately $31,950 for a personal injury lawsuit for pain and suffering. Any money for future medical care is also exempt. The issue arises if the lawsuit is worth more than the $31,950 exemption. What an attorney should do is thoroughly vet any lawsuit by asking specific questions regarding the accident: damage to the car, how injured was the client, treatment the client has received, and should also contact the personal injury attorney to find out the value of the case. I am perplexed by how many debtors do not expect these question from the Chapter 7 Trustee. The Trustees all asked if the debtor is suing or planning to sue somebody, and if the debtor answers yes, they are not able to articulate what treatment they have received. Bottom line: if a debtor needs epidural shots for pain or may need surgery, the case is worth at least $100,000.

I appeared Monday for a hearing and a debtor was asked if she was planning to sue or involved in a lawsuit. She hesitated and asked the Trustee what that meant. Immediately, that is a “red flag” to the Trustee that the debtor was not prepared for the hearing. The Trustee than asked if she is suing anybody, for example, for a car accident. She then responded “yes” and the Trustee proceeded by asking what type of treatment she had received. The debtor played stupid like she did not understand what treatment meant, so the Trustee asked her was she getting physically therapy or seen an orthopedic surgeon. At that point, she was trapped and nervous, and proceeded to say she had months of therapy and was scheduled to get shots for the pain in her lower back. The attorney representing her at the hearing was an appearance attorney, so he had no knowledge of the extent of injury. At that point, the Trustee stated that it sounded she had a serious injury and requested the name and telephone number of her personal injury attorney. The Trustee is prepared to take over the lawsuit and any monies received over $31,950.

My first thought was why would an attorney put this poor woman in a Chapter 7? Why did he not wait until after the case was settled and paid out? Why did he not better prepare her for the lawsuit question and how to answer appropriately, so the Trustee would not be so inquisitive? If the woman needed to eliminate the debt, she could have filed a Chapter 13 and reevaluated after the settlement. This is a true Horror Story—she lost any money for the lawsuit in access of $31,950 for injuries she incurred and the attorney committed malpractice for putting her in the case. Bad result for everybody except the Chapter 7 Trustee, who probably went out for a nice dinner that night.