Have you had this scenario?

You meet with a potential client about a recent auto accident personal injury claim. The client has suffered serious injuries and may be entitled to a significant jury verdict or settlement. However, the potential client does not tell you that he or she is involved in an active bankruptcy case to have his or her debts discharged. You learn that your client has also not told his or her bankruptcy attorney that he or she has been injured and may have a personal injury claim. Very often, clients do not realize the importance of disclosing these potential claims.

What duty do you have, as a personal injury attorney, to discover or determine the existence of a client's or potential client's bankruptcy?

REDUCE YOUR RISK

If you fail to take action to see if the client has or will file a bankruptcy case, this could seriously harm your case or your right to receive legal fees for your hard work, time and risk.

A debtor's (a debtor is someone who files or plans to file a bankruptcy) failure to disclose personal injury claims in a bankruptcy proceeding can have serious consequences for themselves, their bankruptcy attorney and you as their non-bankruptcy personal injury attorney.

Anyone who files a bankruptcy must answer question 5 of the Statement of Financial Affairs in the bankruptcy petition. This question asks:

“Within one year before you filed a bankruptcy case were you a party to a lawsuit, court action or administrative proceeding? List all such matters including personal injury cases, small claims actions, divorces, collection suits, suits to establish paternity, support custody modifications and contract disputes.”

As part of the answer to paragraph 5, your debtor client must fill in a blank whether the case is pending, on appeal or is concluded.

Many personal injury attorneys make this inquiry. More do not ask this question. But what should the non-bankruptcy attorney do to take additional steps to verify a client's status either in or out of bankruptcy? The easy answer is to look up the client's status on PACER (Public Access to Court Electronic Records).

HOW TO SEE IF YOUR CLIENT HAS FILED A BANKRUPTCY

PACER is used by all federal courts, including bankruptcy courts, to save electronic records of all cases filed. New Jersey Bankruptcy Courts have been using PACER for at least the last 30 years. In my firm, we use PACER daily in our bankruptcy work whether we represent debtors, creditors or have persons involved in foreclosure proceedings. We also use PACER to determine whether we can proceed with a collection or foreclosure case. We do not want to violate the automatic stay or the discharge injunction after a case is concluded.

What if your client or perspective client is unsure if they have a personal injury case? It is useful to run a PACER search using the client's name and social security number. This will show cases that have been filed, are ongoing or whether the case is now concluded.

If you need help using PACER you can go to the U.S. Bankruptcy Court for the District of New Jersey's website and register to use PACER. There is no charge to open an account.

PACER will charge you approximately 0.10 cents per page. Often, a search will not cost more than 10 or 20 cents. It is an inexpensive way to protect your fees, your client's case and your reputation.

What if you learn your client is in bankruptcy or after you file suit you learn a bankruptcy case has been filed?

A cause of action for personal injury is part of the bundle of property rights that constitute a bankruptcy debtor's estate. This applies whether your client has filed a Chapter 7, Chapter 11 or Chapter 13. Your best cause of action is to contact your client's bankruptcy attorney and discuss the matter fully.

If there is a Chapter 7 case filed and your client was injured prior to the Chapter 7 case being filed then the claim belongs to a Chapter 7 Trustee. A Chapter 7 Trustee will want all information about the case. The Trustee has the right to control settlement or whether the case should proceed to trial. Your client will have the right to exempt a portion of the personal injury settlement. Your client may be able to exempt at least $27,900 under the Bankruptcy exemption statute 11 U.S.C. Section 522 (d) (11) (D). There may be additional exemptions which would increase your client's rights in his or her personal injury case.

In Chapter 13, your client must tell the Chapter 13 Trustee about their claim. Your client must get any settlement approved by the Bankruptcy Court. The Trustee will want any recovery over the exemption amount of $27,900 to be paid for the benefit of your client's creditors.

PROTECT YOURSELF BY STAYING HIRED

Any attorney handling a personal injury case for someone in bankruptcy or about the file a bankruptcy should obtain an order from the Bankruptcy Court approving their retention as special counsel. The procedure for obtaining such an order is simple. It requires a modest amount of legal work. Debtor's counsel has the necessary pleadings as Court-approved forms. You will need to do a conflict search to be sure you have no adverse interest or to any of the debtor's actual or potential creditors. Failure to get this order may mean you will not receive fees.

GETTING SETTLEMENTS AND CONTINGENT FEES APPROVED

How do you get your settlement approved by the Bankruptcy Court?

Settlement approval can be done by bankruptcy attorneys in two required ways. First, a motion to approve the settlement must be filed and all creditors must be noticed. A notice of proposed settlement of controversy must be prepared by the debtor's bankruptcy counsel and filed with the Bankruptcy Court. The Court Clerk will then send the notice to approve settlement. The notice sets deadline dates by which any creditor, Chapter 7 Trustee or Chapter 13 Trustee must file and serve written objections to the proposed settlement. In the absence of any objection, the bankruptcy judge usually will approve the settlement. When there are written objections, the Court must hold a hearing.

In Chapter 13 cases, all assets acquired either at or after the case has been filed are subject to the rights of the bankruptcy trustee for the benefit of your client's creditors. For this reason, the Chapter 13 Trustee can require periodic reports from you regarding the status of the personal injury case, issues in the case and what you believe the proposed settlement range of the case may be.

WANT TO LEARN MORE?

If you have further questions or would like our office to assist you with determining whether your client is in a bankruptcy, I invite you to contact me.