I Need to File Bankruptcy, and I Have a Long-Term Disability Claim

Many employers offer long-term disability insurance coverage to help people who may become very ill or suffer a severe injury. However, too often, these people end up in dire financial straits, with no money to support a family.

Question: How does this happen when there is long-term disability coverage and the safety net known as Social Security?

Answer: The long-term disability insurer denies the claim, requiring this individual to go through an appeal process that may delay matters for a year or longer. It is also common knowledge that Social Security disability benefits claims are denied for about 77% of those who file. This requires claimants to appeal the decision and then it takes anywhere from 15-30 months for the claim to be heard by a judge. So, those who do not have savings may have to file bankruptcy. After all, it is hard to live on nothing.

When filing bankruptcy, one thing that many clients fail to recognize is that an unliquidated claim (such as a long-term disability claim) must be disclosed on forms filed with the bankruptcy court. If this claim is not disclosed, it could end up barring the claim later. This is one of those things that clients will inevitably fail to bring to their bankruptcy lawyers' attention. A good bankruptcy lawyer may recognize that, if the client is very sick or injured, perhaps there is some of the recovery out there and may follow up with questions. However, a less experienced staff person may be assisting with the claim forms, and the client may not know to list the claim.

In such instances, a defendant, such as an LTD insurer, will assert the doctrine of judicial estoppel (also known as the doctrine of preclusion of inconsistent positions) in litigation. This doctrine is concerned with the orderly administration of justice and regard for the dignity of court proceedings. Even though the insurer was not a party to the bankruptcy proceeding, that is not required for this doctrine to be applicable.

The 11th Circuit has taken a very dim view of failing to disclose a claim on a bankruptcy form. Many lawyers hope they can reopen the bankruptcy matter for the client and add the disclosure much later. In Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1288 (11th Cir. 2002), the 11th Circuit would not allow that. It held that this approach “… suggests that a debtor should consider disclosing potential assets only if he is caught concealing them.” This stance was softened in Slater v. United States Steel Corp., 871 F.3d 1174 (11th Cir. 2017), by taking away the automatic inference that the claimant intends to make a mockery of the judicial system. The court held, “It is not difficult to imagine that some debtors, particularly those proceeding pro se, may not realize that a pending lawsuit qualifies as a ‘contingent and unliquidated claim' that must be disclosed on a schedule of assets.” Id. at 1186.

There is incentive for lawyers as well to try to ferret out such matters. A district court recently awarded sanctions against the lawyers and the client in a wage and hour case when the bankruptcy filing did not have the claim listed. The sanctions were over $50,000! Silva v. Pro Transp., Inc., No. 17-12744, 2018 WL 3801663, at *2 (11th Cir. Aug. 10, 2018). It took an appeal to the 11th Circuit to obtain a reversal of the sanctions.