In a recent Texas bankruptcy case, the bankruptcy court ruled that it would enforce a settlement agreement made in Chapter 11 bankruptcy even though the debtor’s case was later converted to a Chapter 7 bankruptcy .  The terms of the settlement agreement stipulated that the creditor would have access to any future income from legal settlements the debtor received.  However, when debtor did receive settlement income he did not disclose it to the bankruptcy court and argued that he was not obliged to since his conversion to Chapter 7 bankruptcy made the Chapter 11 bankruptcy settlement agreement null and void.

IBC and the Trustee have now discovered that Debtor Mark A. Cantu has an interest in the settlement funds of a personal injury case in Webb County, Texas. The evidence shows that Debtor already received a portion of the funds and did not disclose them to any of the parties hereto. There is an additional amount of money being held in the trust account of John Skaggs to which the Debtors, IBC, and the Trustee all claim to be entitled. The bankruptcy court ruled that the settlement agreement was not null and void and could be enforced by the bankruptcy court.

In the bankruptcy context, settlement agreements are particularly important. “Stipulations settling competing claims and compromises are strongly favored and should not easily be set aside.” In re Wilson, 1988 Bankr. Lexis 811 *3 (Bankr. D.Mont 1988). Such agreements in “bankruptcy cases are necessary for the debtor to attempt reorganization and relief.” Id. Bankruptcy courts routinely enforce settlement agreements. “A contrary result would tend to encourage delays similar to this one in future bankruptcy proceedings and discourage the use of settlements. Spring Park Associates, supra. at 1380.

Debtors who enter into settlement agreements during bankruptcy reorganization and then convert to Chapter 7 bankruptcy, need to clarify with their bankruptcy attorney and the court if that settlement will be annulled.  Failure to seek clarification on this matter could jeopardize post-bankruptcy assets.