If you’re involved in a lawsuit and lose, you may have the right to appeal. Filing for bankruptcy throws a wrench in the works.
People file for bankruptcy to stop lawsuits against them. But when you’re on the other side of the fence – the side bringing the lawsuit – you’ve got to realize it’s a two-way street.
As we’ve discussed in the past, you need to disclose on your bankruptcy papers the fact that you’ve got the right to sue someone.
Once your case is filed with the court, that right becomes the property of the bankruptcy estate. Here’s what it all means to you.
What Is A Property Right?
According to the U.S. Supreme Court in the case of Butner v. United States, property is defined by state law. Whether your right to something – including the ability to sue someone – is considered a property right, in other words, is something controlled by your state rather than by the bankruptcy laws.
Under California law, property is defined as any “right created or granted by statute.” Cal. Civ. Code § 655. That includes the right to sue someone, as well as to appeal a judgment in a lawsuit.
In New York, property rights are defined in a number of places but also include the right to sue or appeal a judgment.
Who Gets Control?
Section 541(a)(1) of the U.S. Bankruptcy Code holds that upon commencement of a bankruptcy case “all legal and equitable interests of the debtor in property” become part of the bankruptcy estate. That means that such interests come under the exclusive control of the bankruptcy trustee in a Chapter 7 bankruptcy; the trustee’s job is then to liquidate the property and use the funds to pay your creditors.
In a Chapter 13 bankruptcy, however, you’ve got some more wiggle room. That’s because in a Chapter 13, you – the person filing for bankruptcy – share the same rights and powers of the trustee.
Why Chapter 7 May Be A Better Choice
Let’s say you’ve got the right to sue someone for damages or injuries, but you don’t have the ability to get a really good lawyer on your side. If the case is good enough, the Chapter 7 trustee may take over and hire a lawyer.
If there’s a good enough recovery then your creditors will get paid, but you may be able to get any excess funds. In addition, your bankruptcy filing will stop collection actions against you until the lawsuit is resolved.
Other Times, Chapter 13 Wins The Day
If you’ve got a lawsuit big enough to cover your debts then you may want to look at Chapter 13 bankruptcy rather than Chapter 7. Chapter 13 allows you to retain control over the lawsuit and any appeals. You’re in the driver’s seat, not the trustee.
Chart A Course Wisely
Any lawsuit you’ve got going on before your bankruptcy filing – whether it’s in court or simply in the planning stages – involves a significant right. Maybe there’s money in it, perhaps other damages of a non-monetary nature. Regardless, this is a time when your bankruptcy lawyer and other attorney need to help you formulate a plan that will work out best for you.