Client Horror Story Contains An Asset Of The Bankruptcy Estate

Do you recognize your client’s tale of woe with prior professionals or not-so-professionals as signs of an incipient asset?

A new bankruptcy lawyer was telling me about his client’s dealings with a loan modification lawyer he called a fraudster.  That relationship  resulted in a near foreclosure on the client’s home while the prior lawyer was saying “don’t worry”.  My friend filed a 13  that was necessary only because of the failings of prior counsel.

But the newbie lawyer had not recognized that the claims of the client against prior counsel were assets of the estate and needed to be disclosed on Schedule B.

The fact pattern is common as clients often either don’t know that the abuse they have suffered triggers a legal remedy or don’t understand that even unfiled claims are claims and therefore assets.

Cases are full of stories of debtors who later identify and elect to pursue a cause of action that predates the petition  and encounter disaster:  “Judicial estoppel” squeals the  defendant.

The concept is that the debtor has taken inconsistent positions, saying in effect on the bankruptcy schedules that no such claim exists, while prosecuting that claim in another forum.

Bankruptcy counsel needs to be alert to evidence of causes of action lurking in the debtor’s history and see that those claims known as of filing are listed.  If properly disclosed, the closing of the bankruptcy case without administration of the asset results in its abandonment to the debtor.

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