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A Cautionary Tale: Lawsuits are an Asset of your Bankruptcy Estate

The U.S. District Court for the District of New Jersey recently held in Lewis v. Portfolio Recovery Associates, LLC, that a debtor's failure to list a lawsuit as an asset of his bankruptcy estate resulted in his loss of the right to claim violations of the federal Fair Debt Collection Practices Act (FDCPA) and the New Jersey Truth in Consumer Contract Warranty and Notice Act (TCCWNA).

The debtor filed the lawsuit in March of 2015 claiming that Portfolio Recovery Associates misled and confused him regarding the nature of his rights when they sent a collection letter that contained a "mini-Miranda" warning labeled as "Account Details."

Prior to filing the lawsuit, however, the debtor had filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code. The trustee issued a report of no distribution and the debtor was discharged. Portfolio Recovery Associates argued that the debtor did not have standing to file the lawsuit because he did not schedule the litigation as a personal asset in his bankruptcy filing.

According to 11 U.S.C. §541, the bankruptcy estate consists of a debtor's legal or equitable interests in property as of the date the case is filed. The scope of this statute is broad and includes possible legal causes of action. Thus, a debtor has the duty to disclose all assets and debts to the bankruptcy court, including any pending or contingent claims. If a debtor fails to disclose an asset in his or her bankruptcy filing, it does not prevent the asset from becoming property of the debtor's estate.

The Court reasoned that when an asset becomes part of the debtor's estate, the rights of the debtor to the asset are terminated unless the asset is expressly abandoned back to the debtor. When the Chapter 7 trustee is appointed, he or she succeeds to the rights of the debtor to pursue any causes of action that are a part of the estate.

If a debtor properly discloses the possible claims before receiving his discharge from bankruptcy, the claims are abandoned to the debtor upon discharge. However, in cases such as Lewis where the debtor fails to disclose a pre-petition claim, the discharge order does not cause the claims to revert back to the debtor. As a result, the Court concluded that Lewis lacked the standing to file a lawsuit for the unscheduled claims because the claims were still assets of his bankruptcy estate. In order for the debtor to obtain adequate standing to pursue the claims, the Chapter 7 trustee must abandon the claims (either voluntarily or pursuant to a court order).

If you are interested in learning more about filing a bankruptcy case and making proper financial disclosures, contact Levitt & Slafkes, P.C. We are experienced in handling a variety of bankruptcy issues. Our offices are conveniently located in Maplewood, New Jersey. Please call us at 973-323-2953 or online to schedule your free initial consultation today.

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