Bankruptcy and employment lawsuits: What you should know

You lost your job, and you believe that you were a victim of worker’s compensation retaliation. However, you have more pressing financial concerns that have prompted you to file for bankruptcy.

What happens now? How does an employment lawsuit affect your ability to file for bankruptcy?

Honesty is the best (and only) policy

Under bankruptcy law, “all legal or equitable interest of the debtor” becomes the property of the bankruptcy estate. That means that even if you haven’t yet filed a labor law claim, the fact that you have the potential for such a claim has to be disclosed to the bankruptcy trustee on your statement of financial affairs.

In essence, this puts the trustee in charge of your case, and the proceeds of your lawsuit against your former employer may eventually be paid to your creditors. On the other hand, the trustee can choose to “abandon” the lawsuit based on the idea that it’s purely speculative or unlikely to garner much money. If that happens, the power to proceed will revert to you.

It’s very important to make sure that both your bankruptcy attorney and the attorney you use for your labor law claim are both aware of the situation. If you try to hide the information from either (and, by extension, the trustee in charge of your bankruptcy estate), you could end up in serious trouble with the court.

It’s not uncommon for people who have lost their job through injuries, retaliation and other misfortunes to end up in bankruptcy court – and there’s no shame in it. The only important thing is that you lay all of your financial cards on the table so that all the players understand exactly what’s happening.

Skip to content