You might not want to file for bankruptcy if you have a shiny new suit . . .

Lawsuit, that is.

You will be surprised when you get to your creditors meeting at what the trustees are interested in. Several of the questions you will be asked to answer may have to do with whether you have any lawsuits pending — or if you have any plans to file one.

Why the primary interest in litigation? One reason, often overlooked by consumer debtors, is that lawsuits are property, and property, in whatever form, may sometimes become the trustee’s property when a bankruptcy case is filed.

In a nutshell, if you have a juicy car accident or worker’s compensation claim outstanding, you may find you bankruptcy trustee eager to become your silent partner in the case, looking to share some of your expected recovery. If the trustee does get some money out of your legal case, he splits it between his office and your unsecured creditors according to a preset formula.

How much of a settlement can a trustee get his hands on? That depends on how much of a wild-card exemption you have left over after protecting your other property. You might have enough exemptions left over to protect the entire anticipated recovery; on the other hand if you have used up you exemptions on hard goods, then the trustee would essentially own your entire claim. Only a bankruptcy attorney would know for sure; a good attorney should be able to come up with an exemption strategy that allows you to keep most of any litigation proceeds for yourself.

 

By Doug Beaton

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