Settlements After Filing For Bankruptcy

William Robert Pruitt was allegedly fired by former State of Oregon aviation director Dan Clem. He sued, and settled out of court for $650,000. The State of Oregon cut Mr. Pruitt a check, but quickly stopped payment before he could get his hands on the money.

Why, and what does this have to do with bankruptcy?

Pruitt and his wife filed for bankruptcy in Oregon on September 30, 2009, according to this story. His settlement with the state came a few weeks later. The State of Oregon found out about it only after being told by Rodolfo Camacho, the Chapter 7 trustee assigned to the case.

There was one big problem, though. Once he filed for bankruptcy, Mr. Pruitt lost his right to take any action in the case – including the ability to enter into a settlement agreement.

Once you file for bankruptcy, all of your property (which includes your right to recover money or property in a lawsuit or settlement) becomes the property of the bankruptcy trustee unless it’s exempt. The trustee can then decide to abandon the property, but that’s up the trustee – not you.

Mr. Pruitt is, as of this writing, trying to convert his case to a Chapter 13 and use the settlement proceeds to pay his creditors back in full. But he can’t do that unless his case is split off from his wife’s, a move that the courts are fighting because she owed the majority of the debt in the first place.

Time will tell as to whether William Robert Pruitt will get his settlement and successfully sever his case from his wife’s. But either way, the upshot is this – once you file for bankruptcy, you cannot settle any pending legal claim without trustee approval.

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