Protection, Tort and other Plaintiff Claims and Litigation Through Chapter 13 Bankruptcy


The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became effective last October 7, 2005. Public Law 109-8. This article is addressed to attorneys who represent clients who are seeking tort or other plaintiff recovery but who do not have sufficient assets or income to keep creditors at bay during the pendency of the action. The client is engaging you to pursue a claim for personal injury, malpractice, employment issues, sports and entertainment issues, insurance claims, worker's compensation, social security and the like but they are suffering collection, lawsuits or dunning activity.

Essentially, money is coming in the future but the creditors are here now.

Not surprisingly, people who are seriously injured, or who have claims based upon employment issues or issues impacting their livelihoods, are impaired in their ability to make a living. Their impaired ability to make a living is almost a given, and may well be part of the measure of damages. At any rate, it is common that people awaiting awards for losses will have the need for protection from creditors while they are waiting.

Bankruptcy Pitfalls

A Chapter 7 liquidating "real" bankruptcy can be disastrous under these circumstances. While there may be an exemption that retains the cause of action to the client in Social Security, Worker's Comp, and VA benefits, for the majority of causes of action the filing of a Chapter 7 bankruptcy case vests the cause of action in the bankruptcy trustee for the benefit of the creditors and divests your client. The trustee and the creditors get the cause of action. The Trustee has broad discretion to settle quickly and cheaply, (he is, after all, a liquidator), and the debtor loses control over the cause of action absolutely. Assuming the cause of action is disclosed, the Trustee may well terminate your representation and hire his partner or colleague to go forth with settlement negotiations and litigation. The Trustee has very little incentive to negotiate really hard, or take a case to trial, to try to obtain the maximum return. Trustees have little incentive to push to provide the debtor some residual benefit.

Perhaps even more disastrous is the debtor who files a Chapter 7 bankruptcy case but does not disclose the existence of the injury to the trustee. Contrary to actual law, debtors tend to make up their own laws such as "if I haven't seen an attorney yet or filed a lawsuit, then it doesn't count and I don't have to disclose it."

Nothing could be further from the truth. The debtor has an absolute duty to disclose all injuries and possible causes of action. Defense attorneys are trained to look up the financial history of plaintiffs to determine if a bankruptcy has been filed. If one has been filed, they will obtain the bankruptcy court file to determine if the cause of action was disclosed. If it was not, under bankruptcy law the cause of action remains property of the bankruptcy estate and Trustee until it is disclosed and administered. A favorite trick is to wait until the day of trial, moving for dismissal on the basis that the plaintiff is not the proper party plaintiff since the cause of action belongs as a matter of law to a bankruptcy trustee who is unaware of the claim and the lawsuit.

Wage Earner's Reorganization

There is a solution to this problem. If the debtor files a Chapter 13 "wage earner's reorganization" bankruptcy case then the cause of action is property of the bankruptcy estate, but the debtor stays in charge of the cause of action. The debtor selects his own representation, and the debtor's bankruptcy attorney will arrange for the personal injury or similar counsel to be hired by the bankruptcy court upon application and bankruptcy court order. The debtor and his state court counsel will determine when an appropriate offer of settlement has been made, and bankruptcy counsel will then present the proposed settlement to the bankruptcy court for ultimate approval. It is common for personal injury counsel's original representation contract to be respected and approved so that contingency fees are paid directly from settlement proceeds. Concededly, the bankruptcy judges retain jurisdiction to determine all fees of professionals in bankruptcy, but it is common practice that the retainer agreement is respected and awarded so long as a quick settlement does not constitute a windfall.

It is then up to the bankruptcy court to determine distribution of the debtor's share of the settlement, Of course if the settlement is large, the creditors can be paid off and the rest distributed to the debtor. In those circumstances the debtor may choose to dismiss the Chapter 13 as soon as the settlement is reached, since Chapter 13 cases are strictly voluntary and can be dismissed by the debtor - normally even without the formality of a hearing. Sometimes it is better to pay the claims in the bankruptcy case since unfiled claims or interest may not be payable.

Settlements

If the settlement is small, then bankruptcy counsel files a motion asking the court to equitably distribute the proceeds. Bankruptcy courts are courts of equity. In circumstances like these the bankruptcy judges try very hard to be fair. In small awards circumstances my motion will request monies be given to the debtors for dental repairs, medical operations, automobile repairs, home repairs and any other reasonable circumstances. The judge will then allocate the award between the debtor(s) and the creditors.

In circumstances where the settlement is significant, but not enough to pay the creditors in full, an even more complicated negotiation can occur. In those instances I aspire to reach a settlement where some money will go to the trustee for the creditors, and the judge will deem the case completed and issue a discharge. The creditors get some money, the debtor(s) gets some money, and the bankruptcy case is ended early, with the debtor(s) receiving a discharge of any debts unpaid. Sometimes this is successful, but it is discretionary with the judge.

Conclusion

The 2005 changes in bankruptcy law were annoying, but for most people rights to bankruptcy relief were not seriously impaired. There is substantially more work and a greater burden of expertise on the bankruptcy professionals, but the individuals seeking bankruptcy relief will probably find relief similar to that which was available before the federal law changes. In fact, for debtors who earn less than the median income in their district, ($37,099.00 for a family of one to $68,125.00 for a family of five), most of the new tougher measures do not apply, and in Chapter 13 cases the relief available under the new laws may be more generous than the relief that was available prior to the changes. Previously the Tampa bankruptcy judges required a minimum distribution of twenty percent to general unsecured creditors, but it is generally accepted that the new laws have done away with that requirement. There may now be no minimum return to the general unsecured creditors.