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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Lawsuit settlements can be eliminated in bankruptcy, but it could be risky to your business.
Bankruptcy Adviser

Judgments can be eliminated in bankruptcy

Dear Bankruptcy Adviser,
How does a Chapter 7 bankruptcy affect a lawsuit? Say a doctor is being sued for malpractice and then files Chapter 7. Will that debt be eliminated in the bankruptcy?
-- Cindy

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Dear Cindy,
This type of question is very difficult to answer because of the enormous number of variables. In general, a lawsuit can be included and eliminated in a bankruptcy. If the person qualifies for bankruptcy, then he or she can include the creditor/plaintiff judgment in the list of debts.

However, there are a few initial issues that the doctor must consider prior to filing a case.

1. Can he or she qualify for Chapter 7 bankruptcy?
The new bankruptcy laws enacted in October 2005 were enacted to ensure bankruptcy was not being abused. The proponents of the new laws claimed that doctors, lawyers and other highly paid professionals were qualifying for bankruptcy protection while paying very high mortgages or high luxury car payments. In general, creditors believed these same individuals should pay back some of their debt and not wipe everything out.

However, highly paid professionals can file bankruptcy, and even qualify for Chapter 7 bankruptcy, but their income and expenses will be highly scrutinized.

2. Is this lawsuit dischargeable in bankruptcy?
Most judgments can be included in a bankruptcy and can be eliminated. For example, a credit card company or car lender sues an individual and gets a judgment for the balance owed. This debt can be eliminated.

Sometimes, a creditor will be included in a bankruptcy and file an adversary complaint against the debtor inside of the bankruptcy. An adversary complaint is similar to a lawsuit outside of bankruptcy; it just has a different name and different procedures.

While I do not have the facts regarding this particular lawsuit, in general a creditor/plaintiff might not easily let the doctor eliminate the debt without a fight. For example, the creditor might claim that the doctor committed an intentional injury against him or her or committed some sort of fraud. If that was alleged in the original lawsuit, then it might not be eliminated in bankruptcy.

3. What assets will he or she lose in filing bankruptcy?
The doctor must be very careful to obtain a thorough consultation prior to filing bankruptcy. If the doctor has his or her own practice, then that practice could be sold by the person assigned to the bankruptcy case, that is, the trustee.

For highly paid professionals, his or her practice could be at stake. Doctors and accountants may have established practices that could be sold to others in the same profession. A lawyer may have cases that he or she is working that have potential for large awards or settlements. And even a stockbroker might have a valuable book of clients that another broker might be willing to buy.

In short, yes, a malpractice claim could be included in bankruptcy, but an experienced bankruptcy attorney will be able to more fully analyze the likelihood that the claim would be eliminated.

Bankrate.com's corrections policy -- Posted: Feb. 17, 2009
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