When a manufacturer responsible for a defective product files for bankruptcy, the legal path for injured consumers becomes murky. Questions about whether you can still sue, get compensation, or join a mass tort case are common. While bankruptcy offers financial relief to corporations, it also creates serious barriers for victims seeking justice. In this guide, we’ll unpack how bankruptcy law affects product liability claims and what legal remedies are still available to injured consumers.
Understanding Bankruptcy in Product Liability Cases
What Is Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to resolve or eliminate debt under the protection of federal law. For manufacturers, this often involves dealing with debts, lawsuits, and obligations related to defective products.
Why Do Manufacturers File for Bankruptcy?
Manufacturers file for bankruptcy to:
- Reorganize and continue operations (Chapter 11)
- Liquidate their business and pay off debts (Chapter 7)
- Avoid or discharge liability from lawsuits
These filings can greatly affect your ability to sue or receive compensation for injuries caused by defective products.
Key Bankruptcy Types in Product Cases
Chapter 11 (Reorganization):
The manufacturer restructures its finances and may continue operating, often by renegotiating debts and liabilities.
Chapter 7 (Liquidation):
The company ceases operations, its assets are sold, and creditors receive distributions. Lawsuits may be halted or dismissed.
The Automatic Stay: A Roadblock to Justice
What Is an Automatic Stay?
An automatic stay is a legal mechanism that halts all pending lawsuits and collection actions against the company once it files for bankruptcy. This applies to:
- Personal injury lawsuits
- Product defect claims
- Judgments or court proceedings
How Does the Automatic Stay Affect Victims?
If you’ve filed a lawsuit against a manufacturer, the automatic stay prevents your case from moving forward. You must request special permission from the bankruptcy court to continue litigation, and this is rarely granted unless specific exceptions apply.
Lawsuit Viability After Bankruptcy
Can You Still Sue?
You can sometimes sue a bankrupt company, but it depends on:
- When your injury occurred
- Whether your claim is listed in the bankruptcy
- The type of bankruptcy filed
- Court decisions about lifting the stay
Is It Worth Filing a New Lawsuit?
If the claim has been discharged or the court denies permission to lift the stay, filing a lawsuit may not result in compensation. However, some victims may still benefit from trust funds or insurance policies that are not protected by bankruptcy.
What Happens to Product Liability Claims?
Pre-Bankruptcy vs. Post-Bankruptcy Claims
- Pre-bankruptcy claims—those based on injuries that occurred before the bankruptcy filing—are often subject to discharge.
- Post-bankruptcy claims—injuries happening after the filing—may still be valid but must be evaluated individually.
Are Claims Always Discharged?
Not always. Some injury claims are excluded from discharge if they involve:
- Fraud or intentional misconduct
- Criminal acts
- Personal injury from driving under the influence (rare in product cases, but an example of legal exceptions)
Mass Tort and Trust Fund Scenarios
How Are Mass Torts Handled?
Mass torts involve many plaintiffs injured by the same product (e.g., defective medical devices, toxic chemicals). When manufacturers go bankrupt during these events, courts often require them to set up a trust fund.
What Are Bankruptcy Trust Funds?
A trust fund is a separate legal entity established during bankruptcy proceedings. It holds funds specifically to compensate injury victims outside the standard lawsuit process.
How Do You File a Claim with a Trust?
You typically need to:
- Submit medical records and product usage evidence
- Complete claim forms
- Meet filing deadlines
- Wait for administrative approval and payment
Successor Liability: Suing the New Company
What Is Successor Liability?
Successor liability occurs when a new company acquires the assets of a bankrupt manufacturer and continues the business. In some cases, courts hold the new company responsible for the old company's legal liabilities.
When Does Successor Liability Apply?
It may apply if:
- The new company keeps selling the same product
- The acquisition was structured as a merger
- The new company agreed to assume legal liabilities
Consult a legal expert to determine if you can sue the successor entity in your case.
Filing as an Unsecured Creditor
What Is an Unsecured Creditor?
Unsecured creditors are those who do not have a legal right to specific collateral or property. In injury cases, you are considered an unsecured creditor unless your claim is tied to a trust fund or court order.
How Do You File a Claim in Bankruptcy Court?
You’ll need to:
- Submit a proof of claim form before the court’s deadline
- Provide documentation of your injury and its connection to the product
- Monitor the proceedings for updates
Payouts to unsecured creditors are often low because secured creditors get paid first.
What to Do If You’ve Been Injured
Step 1: Determine the Type of Bankruptcy Filed
Start by researching whether the company filed Chapter 11 or Chapter 7. This shapes the direction of your legal options. You can check PACER (Public Access to Court Electronic Records) or consult an attorney for details.
Step 2: Check for Trust Funds
Some bankrupt companies create trust funds to compensate injury victims. Look online or through the court records for mention of an asbestos trust, product liability trust, or similar fund.
Step 3: Consult a Lawyer
Because of the complexity of these cases, it’s crucial to speak with a personal injury attorney who also understands bankruptcy law. They can help:
- File a claim properly
- Petition the court to lift the stay (if applicable)
- Evaluate successor liability claims
- Access trust fund compensation
Frequently Asked Questions (FAQs)
Can I still sue a manufacturer after they’ve filed for bankruptcy?
Yes, in some cases you can, but it depends on the type of bankruptcy filed and the timing of your claim. When a manufacturer files for bankruptcy, an automatic stay typically halts all legal proceedings. If your injury occurred before the bankruptcy filing, your lawsuit may be paused or discharged entirely. However, if your injury happened after the filing or under special circumstances—such as fraud or misconduct—you may still be allowed to sue, often with court approval.
What happens to my product liability lawsuit if the company goes bankrupt?
Your lawsuit may be frozen due to the automatic stay. The stay prevents creditors, including injury victims, from continuing legal actions against the company. To resume your lawsuit, you must request permission from the bankruptcy court, which is not always granted. In many cases, your claim might be addressed in the bankruptcy reorganization plan or through a trust fund if one has been created for victims.
Will my injury claim be wiped out or discharged in bankruptcy?
That depends on whether your claim is categorized as a pre-petition debt. If your injury occurred before the company filed for bankruptcy, the court may discharge your claim as part of the debt reorganization or liquidation. However, some personal injury claims—especially those involving fraud or intentional harm—may be excluded from discharge. It's essential to have a legal professional review your specific case to determine whether your claim can survive the bankruptcy process.
Is there any way to get compensation if the company no longer exists?
Even if the manufacturer has ceased operations, you may still be eligible for compensation through alternative means. These could include a trust fund established during bankruptcy, liability insurance policies that remain active, or successor companies that acquired the bankrupt business’s assets. Additionally, you may be able to file a claim as an unsecured creditor during the bankruptcy proceedings, although the payout could be limited depending on available assets.
What is a trust fund in bankruptcy, and how does it help me?
A trust fund in bankruptcy is a pool of money set aside specifically to compensate victims of injury or illness caused by a company’s defective products. Trusts are often used in mass tort cases, like those involving asbestos or dangerous pharmaceuticals. If such a fund has been created, you can file a claim directly with the trust instead of pursuing a traditional lawsuit. The process typically involves submitting documentation of your injury, product exposure, and supporting medical records. If approved, the trust may issue a payout based on standardized criteria.
Final Thoughts: Know Your Rights and Act Fast
Bankruptcy filings by manufacturers of defective products complicate the legal process, but they don’t eliminate your rights entirely. Injured consumers still have legal pathways to recover damages—whether through trust funds, successor companies, or bankruptcy court claims. The key is understanding the structure of the bankruptcy, the timeline of your injury, and what remedies exist under the law.
Contact Fulginiti Law Today
If you’ve been injured by a product and later discovered that the manufacturer has filed for bankruptcy, your time to act is limited. Consult a lawyer who specializes in personal injury and bankruptcy law. They can help determine the best course of action and whether you still have a viable claim. Don’t delay—contact Fulginiti Law today to protect your rights and explore your options.
