Law Office of Nancy Grim

Northeast Ohio Employment Attorney

Nancy Grim, LLC
P.O. Box 108
Kent, Ohio 44240-9998
Phone: (330) 678-6595
Fax: (844) 270-7608

Employee Bankruptcy and Lawsuits

Note: If you are currently pursuing or plan to bring a lawsuit against your employer, or have filed a claim with an administrative agency such as the EEOC, it is extremely important to consult with your lawyer (both your employment lawyer and your bankruptcy lawyer, if you have one) before filing for bankruptcy. This move will have extremely important consequences for your claim against your employer, so it is critical that your attorneys be aware of your plan to file for bankruptcy and have an opportunity to fully advise you how filing for bankruptcy will affect your employment case.

If you have already filed for bankruptcy and have not yet told your bankruptcy and employment lawyers, it is very critical that you do so immediately, as you and your attorneys must act promptly to try to minimize the consequences of the bankruptcy filing. The longer that you delay, the more likely it is that your actions may be viewed as an attempt to mislead or defraud the bankruptcy court, which could cost you the ability to pursue your employment case.

Having to file for bankruptcy during a dispute with your employer, or former employer, is an all too real possibility. After all, you likely would not be suing if you were getting the money you deserved. While the effects of bankruptcy may seem complicated at first, the basic rule is that your creditors take precedence. To learn more about bankruptcy and how it may affect your lawsuit, read below:

1. If I file for bankruptcy, how will it affect my employment case against my employer?

When you file for bankruptcy under any chapter of the Bankruptcy Code, all of your assets become “property” of the bankruptcy estate and becomes subject to administration by the bankruptcy court in which you file. Therefore, if you file for bankruptcy protection at any time after your employment claim arises, your interest in any pending lawsuit also becomes property of the bankruptcy estate, which includes “all legal or equitable interests of the debtor in property as of the commencement of the bankruptcy case.” 11 U.S.C. § 541(a)(1) The relevant date for bankruptcy purposes is when the claim arises – when the event or events at work occurred that are the subject of your lawsuit – not when you actually file your administrative claim or lawsuit itself.

The consequences of your bankruptcy filing can be dramatic. Filing a bankruptcy petition literally robs you of any standing to direct the course of your employment lawsuit – and the authority to receive directly the proceeds of any monetary award obtained in the litigation.

Instead, the bankruptcy court and any trustee appointed by the court to administer your assets have the authority to determine:

 

Whether to pursue a cause of action;

The rate(s) at which any attorney will be compensated for the representation; and,

Whether and upon which terms to settle the litigation.

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2. Can my current attorney continue to represent me in my employment case once I have filed for bankruptcy?

Your attorney must obtain the bankruptcy court’s approval to be retained as “special counsel” to pursue the litigation. Needless to say, your attorney may not be eager to continue representing you if there is a chance that he or she will not be retained by the bankruptcy trustee and/or receive the compensation agreed upon when you signed an agreement for representation. That is why you need to inform your attorney immediately, if you have not done so already, once you file for bankruptcy, so that your attorney can take the appropriate steps to be hired by the trustee to continue pursuing your case.

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3. What happens if I filed my employment lawsuit first, and now need to file for bankruptcy?

The Bankruptcy Court requires debtors to identify all of their assets on their bankruptcy schedules in order to give the trustee and all creditors the opportunity to decide how to “administer” the bankruptcy estate. In Chapter 7 liquidation or in a Chapter 13 adjustment of debts of an individual, a trustee will be involved.  In a Chapter 11 reorganization, which is permissible for some high-income individuals, a trustee may or may not be appointed, but the court's authority to administer the case through the bankruptcy estate remains.

This means that when you file for bankruptcy, you must disclose, under penalty of perjury, “all suits and administrative proceedings to which the debtor was or is a party within one year immediately preceding the filing of the bankruptcy case.” Form 7, Statement of Financial Affairs Additionally, you must disclose “contingent and unliquidated claims of every nature,” and equitable interests. Schedule B, Personal Property You also are obligated to estimate the value of the claims, which you should do in consultation with your employment attorney.

Therefore, any charge pending before the EEOC or any state office of human rights, or other state or federal agency administrative proceeding, as well as any claims pending in any court must be disclosed.

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4. What happens if I have not disclosed my employment claim in my bankruptcy case?

A trustee, with the court’s approval, may decide to wait to receive funds from a pending claim and distribute the proceeds to the debtor’s creditors, or she may decide to “abandon” the claim, at which time any proceeds would go directly to the debtor. In many cases, the trustee will determine that the claim is too speculative or will take too long to prosecute, and therefore will not hold up the timely resolution of the bankruptcy case, and will elect to abandon the claim. Whether the trustee pursues the claim on behalf of the bankruptcy estate and its creditors is up to the trustee’s discretion, but must be determined under the court’s supervision.

Where, however, the trustee does not abandon the claim, the proceeds of the litigation must pass through the bankruptcy estate for distribution to your creditors. If any excess funds are available after all creditors have been paid, the trustee will disburse the remaining funds to the plaintiff/debtor.

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5. What happens if my bankruptcy case has been closed already?

6. I need my workers’ compensation to pay my medical expenses. Will my workers’ compensation become part of the bankruptcy estate?

All states have a list of assets that are exempt from becoming part of the bankruptcy estate, and chances are your workers’ compensation is one of those assets. However, due to complicated nature of some states’ bankruptcy laws, it is best to ask your bankruptcy lawyer about the laws in your state. For example, in California if your workers’ compensation settlement has been modified, like when you receive an advanced payment on the settlement, then your workers’ compensation may no longer be exempt.

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The content on this page was provided by Linda Correia.