How Lawsuits And Bankruptcy Disputes Resolve

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.