Is Bankruptcy Preferred Forum to Defend Civil Fraud?
An attorney called me this week to discuss a prospective bankruptcy client. The client was being sued in state court by numerous people who alleged they were fraudulently billed for chiropractic services. The client could no longer afford attorneys fees involved in these multiple suits. The attorney suggested that a chapter 7 bankruptcy would focus all the fraud allegations into a bankruptcy court setting. He suggested that the bankruptcy would effectively consolidate the civil suits, provide faster resolution, and possible give the client a more sympathetic forum. The question was whether bankruptcy is a preferred forum to defend civil fraud.
Bankruptcy may be used as a forum to defend fraud allegations in some circumstances. The debtor must be willing to relinquish all non-exempt property to the bankruptcy estate. Defendants with significant non-exempt assets might fare better by asset protection planning and defending lawsuits outside of bankruptcy. The defendant in this case would probably get a faster resolution of the issues in bankruptcy. Bankruptcy litigation tends to be more focused on arriving at a fast determination in order to close the estate as soon as possible for the benefit of creditors, and is less bogged down in procedures. Whether the defendant would get a more sympathetic hearing in bankruptcy is uncertain. Bankruptcy courts are sympathetic to honest debtors whose financial distress is a result of external factors. Debtors who seem to be abusing the system or who have intentionally harmed others are generally treated no better in bankruptcy than in state court. This particular defendant has yet to decide if he wants to commit to bankruptcy and forfeit some non-exempt assets in process of focusing his several civil fraud complaints.
posted by Jonthan Alper, asset protection and bankruptcy attorney, Orlando, Florida
