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Virtually all pending litigation and potential lawsuits may be
classified as contingent when filing bankruptcy. As a contingent,
unliquidated, disputed claim, potential judgment creditors are assigned
the lowest priority of all creditors and recovery remains highly
unlikely. For a defendant or claimant to protect a potential cause of
action, the claim must be resolved before the court closes the
bankruptcy file. In practice, this resolution requires filing an
ancillary federal lawsuit - known as an adversary proceeding in
bankruptcy - to litigate all disputed issues of both liability and
damages. The cost of this federal litigation alone deters most claimants
from contesting the classification as a disputed debt, when the prize
for winning is merely preserving a
claim against an insolvent defendant.
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