When “Jane” came to me about filing bankruptcy she was in dire straits. She had been sued by at least one creditor and was about to have her wages garnished. If her wages were garnished, the loss of 25% of her wages not have left her enough income to keep her mortgage and utilities paid and meet her other necessities.
Jane met all the qualifications to be able to file a Chapter 7 bankruptcy, but there was an issue. Jane’s father had died about one year earlier and his estate had a lawsuit against the nursing home where he died. A person having a claim of some type, but currently being in poor financial shape is fairly common. Often times an on the job injury (Worker’s Comp) or a car wreck (Personal Injury) results in a loss of income and an inability to pay debt. Jane had been told by the estate attorney that her father’s type of case, a wrongful death due to alleged malpractice by the nursing home, rarely settle and it could be years before the case went to trial. Even then there was no assurance they would win.
So, what do you do? First, I explained to Jane that if she wanted to file bankruptcy, it is absolutely required that the lawsuit/claim be listed as an asset. This is very important and there has been a lot of litigation over this issue in the past few years. Lawsuits and estates are public records and are impossible to hide, do not try. Failing to list a claim or lawsuit on your bankruptcy petition may damage your chances of recovering any money from that lawsuit or claim. Second, I informed Jane that if and when she becomes entitled to any money from the lawsuit, the money would have to be paid to the bankruptcy trustee of her bankruptcy case and she may receive very little of the proceeds. The amount she would receive would depend on her remaining personal property exemption, the amount of the proceeds, and the amount of claims filed by creditors. With knowledge of the possible outcome, Jane decided she still needed to file bankruptcy immediately.
Although Jane’s situation was different, it is normally required that the attorney representing the debtor in their lawsuit or claim file a motion with the bankruptcy court to be approved as the attorney and to have their fee contract approved as well.
About a year after filing, her father’s wrongful death case settled. Jane’s share was about $20,000. What happened to the money? The $20,000 was paid by the estate’s attorney to the bankruptcy trustee. Jane still had $1,000 of her $3,000 personal property exemption available, so she was allowed the first $1,000. The trustee received a fee out of the proceeds, normally 10%. Then creditor claims were paid. In Jane’s case only $12,000 of creditor claims were filed which was much less than her debt at the time she filed. After all creditor’s claims were paid, Jane received the remainder. So, all in all Jane received about $6,000 from the settlement.
I am sure Jane would have rather had the entire $20,000 share of the settlement, but her actual outcome really was not that bad. If she had had the $20,000 immediately before she filed, she would have had to have paid all or almost all of it to creditors. At least she was able to eat and pay her bills during the year before the case settled and was even able keep a good portion of the settlement after bankruptcy. Remember, this is not always the case. If all her creditors had filed claims, she would have only received the $1,000 exempt portion.
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