The Unwritten Future: Contingent Claims in Bankruptcy

Contingent Claims in Bankruptcy: Assets You're Not Sure You'll Ever Really Have


Contingent Claims: Disclose Everything!

All assets of whatever value must be listed and disclosed in a Chapter 7 or Chapter 13 bankruptcy petition. This includes assets that are not necessarily "physical" assets like a couch or automobile or a piece of jewelry. For instance, a claim for funds owed to you by someone else is also an asset that must be listed and valued in a bankruptcy petition. But what if the existence of the claim itself is contingent upon some event happening that has not yet occurred? In that case, the claim is a "contingent claim," which is to say that the claim is contingent upon that other thing happening. Right now, if that thing hasn't happened, there is no claim. Later on, after, say, the Mars Rover finds little green men, if you have made a wager that Martians do exist, there may be. That is a contingent claim. A contingent claim must be listed and valued the same as any other non-contingent claim, the same as any asset that is of a more physical or material nature. The real question is what value to assign to such a claim.

What Is A Contingent Claim Worth?

A "non-contingent," such as a debt owed to you by a friend to whom you lent a specific amount of money (e.g., eight months before filing, you lent your best friend $1,000, which he or she has not yet repaid, so that claim is valued at $1,000—assuming no interest) can have a variable or arguable value based upon the likelihood that the debt is collectible. In this example, the $1,000 debt owed to you by your best friend can still be worth arguably nothing at all if the best friend happens to be unemployed, homeless, living only on Social Security funds, with no property to be seized or funds to be garnished. A claim that is not collectable is not really worth $1,000. Likewise, this is true of a contingent claim. The odds of the claim being worth anything at all depend greatly upon the odds of the triggering event upon which the claim is contingent actually happening. The Martian wager is an example of a contingent claim that may be worth little or nothing. Odds are pretty good that the Mars Rover will not find little, green men. If the best was for $1 million, that contingent asset would be worth quite a lot of money IF little, green men were located—but what are the odds? A more realistic example might arise from a personal injury claim if the bankruptcy is being filed after you've been bitten by someone's dog. The personal injury claim as an asset is contingent upon you A) finding a PI lawyer to take your case; and B) winning the case (or settling it). The value of the contingent PI claim, initially, at least, is the amount of the demand that the PI lawyer would make to the dog-owner. It may actually be worth that amount of money as set off against the costs of pursuing the suit, the costs of retaining the PI lawyer, and the odds of the case resulting in a damages award or settlement.

Contingent Claims in Bankruptcy: The Bottom Line

Thus, it is vital that you retain an experienced bankruptcy attorney if you are planning on filing for bankruptcy so that such potential assets are not overlooked. A good bankruptcy lawyer will be able to help you document the contingent claim, assess its value, negotiate with a Chapter 7 Trustee who may have an interest the claim, and interface with a personal injury attorney if need be. Claims not listed are claims lost. If you fail to list something like a personal injury claim in your bankruptcy petition schedules, the fact that you failed to list it will provide the eventual defendant or other party to the claim with a "res judicata" (judicial resolution of the matter) of the legal controversy providing the basis of the claim. In other words, you'll lose that PI case later on if you didn't list in your bankruptcy petitions. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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If you enjoyed reading "Contingent Claims in Bankruptcy," please browse our other articles on our main Michigan Bankruptcy Blog.

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