Class Action Settlements and Bankruptcy

If you file for bankruptcy, a class action claim that arose before you filed is generally treated as property of your bankruptcy estate, so you must list it and the trustee may be entitled to the payment unless an exemption applies. If the company being sued files for bankruptcy instead, the class action is usually paused and class members become creditors, which often means smaller and slower payments. Both situations depend heavily on the facts, so a bankruptcy attorney is the right person to ask.

When you are the one in bankruptcy

Under the US Bankruptcy Code, the estate includes nearly all of your legal and equitable interests in property when you file, and that includes potential legal claims, even small ones you haven't filed yet. A claim in a class action over something that happened before your filing date is usually part of the estate.

• ✓Disclose it. List known claims, including class action claims, on your bankruptcy schedules. Leaving a claim off can cause problems later, including losing the right to pursue it.
• ✓The trustee decides. In Chapter 7, the trustee may collect the payment for creditors, or abandon it if it's too small to be worth administering.
• ✓Exemptions may protect it. Federal and state exemption rules sometimes let you keep some or all of a recovery. Which apply depends on your state.
• ✓Chapter 13 is different. You keep your property, but a settlement may need to be reported and could affect your plan payments.

When the defendant goes bankrupt

When a company files for bankruptcy, an automatic stay generally halts lawsuits against it, including class actions. The class's claim then moves into the bankruptcy case, where it competes with other creditors. Secured creditors are paid first, and unsecured claims like most consumer class claims are often paid only a fraction of their value, sometimes years later.

1. 1Watch for a notice of the bankruptcy and a deadline to file a proof of claim, called the bar date.
2. 2Check whether class counsel can file a class proof of claim on everyone's behalf. Courts differ on whether to allow it.
3. 3If you're asked to file an individual proof of claim, do it before the bar date.
4. 4Expect any distribution to follow the bankruptcy plan, not the original settlement terms.

Sometimes a bankruptcy plan creates a trust to pay a large group of injury or product claimants over many years. That's common in mass tort cases. Our guide on class actions versus mass torts explains the difference.

Settlements about bankruptcy

There's a third way the two overlap: class actions about how bankruptcies are handled by others. Credit reporting agencies and lenders have faced cases over reporting debts as still owed after they were discharged in bankruptcy. If you've been through bankruptcy, these settlements may cover you. Our guide to settlements and your credit score covers related questions.

Practical steps

• ✓Tell your bankruptcy attorney about any class action notices you receive, before and during your case.
• ✓Don't cash a large settlement check during an open bankruptcy case without asking your attorney or trustee.
• ✓Keep the notices and claim confirmations with your bankruptcy paperwork.

Garnishment and collection after bankruptcy

Once your bankruptcy case is closed and debts are discharged, a settlement payment you receive later for a claim that arose after filing is generally yours. If a creditor tries to collect a discharged debt from that money, that's usually a violation of the discharge injunction, and your bankruptcy attorney can address it. For debts that weren't discharged, such as certain taxes or support obligations, the usual collection rules apply. See whether a settlement payment can be garnished.

If a case was closed without the claim being disclosed, and you later learn about a settlement covering a period before your filing, talk to your attorney. Courts can reopen cases to administer assets that weren't scheduled, and handling it openly is far better than the risks of keeping quiet.

SettleScout can help you keep an organized list of the settlements you've claimed and what they paid, which makes it easier to give your attorney or trustee a complete picture. Check open settlements to see what you're already part of.