Bankruptcy can help both sides of your balance sheet. Getting a fresh start means not just being relieved of debt, but also protecting essential assets. You can preserve this  benefit by not selling, using up, or borrowing against your protected assets BEFORE your  case is filed. In order to regain your financial footing, you will need housing, basic household goods, clothes and – where appropriate – tools of the trade, unemployment or disability benefits and retirement savings. Bankruptcy usually protects these things. Specifically, Chapter 7 protects all “exempt” assets. And if the applicable exemptions do not protect all of your property, Chapter 13 usually provides protection. But bankruptcy cannot protect what you’ve sold, given away or used up. Clients often recount how, within the year or so before deciding to file their case, they depleted their retirement account or sold off household goods in an attempt to avoid bankruptcy. But those things usually would have been protected had they filed their case when they still had the assets. As they say, hindsight is 20/20, but if you are one of those trying to avoid bankruptcy and you are thinking of spending, selling, or borrowing against any of your assets, do you know whether it would be protected in bankruptcy? This type of decision has long-term consequences and is often made without any legal advice about the alternatives. If someone in her 50s cashes in a 401(k) retirement account to pay credit-card companies, that decision can hurt her retirement years.  Or if a couple sell a debt-free car that is in good condition, believing that they’ll lose it in a bankruptcy, that decision could adversely impact their ability to get to work. People tend to wait until they are at the end of their rope before getting legal advice, well after they have made these types of adverse decisions.  But you can obtain a better fresh start by going for legal advice early enough to preserve your assets.

Photo by e.t.

Of course, I do need to know about actual, ongoing lawsuits, but in this post I’m talking about claims the debtor might have against another individual or against a company.

Why would I want to know about possible lawsuits you might have against others that you never filed in court? Because they are assets. They are assets because, if filed, they might bring in some money to you.

Now, it’s true that court fees, attorney’s fees and expert witness fees might eat up a lot (or maybe even all) of a recovery you might get in a lawsuit, depending on how much in damages you stand to recover. But a danger of not telling the bankruptcy court about your potential lawsuits is that you might no longer have the right to sue after the bankruptcy is over.

This is because a person who is filing for bankruptcy has an obligation under the law to disclose all of his or her assets or potential assets to the bankruptcy court. When you fail to disclose a potential lawsuit to the bankruptcy court but then you later (after the bankruptcy discharge) file that lawsuit, you have taken an inconsistent position – you’ve sworn to a bankruptcy court that you had no assets other than those you disclosed, and those assets didn’t include a potential lawsuit; and yet, you then filed a lawsuit after the bankruptcy based on a pre-bankruptcy claim. The law basically says that you cannot have it both ways.

When you file for bankruptcy, a bankruptcy estate is created. All of your assets, including potential lawsuits, become property of the bankruptcy estate, except for those assets you have managed to exempt. If you do not specifically list and exempt an asset, it is property of the bankruptcy estate. The rule of thumb is that it is always a better idea to list it and exempt it than not to list it at all.