Judicial Estoppel and Bankruptcy

Discharge DebtIn the law, judicial estoppel prevents a party from taking an inconsistent position in more than one legal proceeding.  In other words, you can’t say one thing in a criminal case and another thing in a divorce case if they are inconsistent with each other.  This type of legal doctrine is sometimes applied to bankruptcy cases.  Debtors who fail to disclose an asset in their schedules may not be able to assert ownership of the asset in subsequent legal proceedings.  For example, consider a debtor who was injured in a car accident prior to filing bankruptcy.  At the time the debtor is injured he has a contingent asset.  The asset is a cause of action, which is contingent upon filing suit against the party who injured the debtor, and being successful in the lawsuit, either by obtaining a judgment or settling the claim.

If the debtor fails to list the cause of action in their bankruptcy schedules, then the defendant in the personal injury lawsuit may assert judicial estoppel against the debtor.  Failure to list the claim in the schedules could prevent the debtor from pursuing the cause of action.  However, judicial estoppel against the debtor may not prevent the trustee from pursuing the claim on behalf of the bankruptcy estate.  This means that the trustee may be able to pursue the cause of action in order to obtain money for the creditors listed in the bankruptcy case.

Failing to list an asset isn’t always caused by deception on behalf of the debtor.  The debtor may simply not understand that intangible things like a cause of action are an asset that have to be listed.  In many cases the debtor’s interest in the property is exempt, which means that there is no incentive for not disclosing the asset, because it will be protected from the bankruptcy estate.  However, the burden is on the debtor to be sure they list all of their assets, and a good Allen TX bankruptcy lawyer will ask questions designed to identify these types of assets.