You Can File A Bankruptcy With A Lawsuit Pending But The Lawsuit Will Probably Be Put On Hold
By Carron Nicks
COVID-19 Update: Bankruptcy courts will hold 341 creditor meetings telephonically or by video appearance until 60 days after the termination of the President’s COVID-19 National Emergency Proclamation. For details, visit the U.S. Trustee’s 341 meeting status webpage or your court’s website. If you’re one of the many struggling with debt due to COVID-19, it’s best to develop a financial plan early. Learn about your options in What to Do If You Can’t Pay Bills Due to the Coronavirus or about bankruptcy for small businesses.
You can file for bankruptcy when you have a lawsuit pending in another court. The bankruptcy case will likely suspend the trial temporarily or end it altogether if it concerns money or property. By contrast, the bankruptcy won’t stop most cases brought in the family or criminal court. In this article, you’ll find out how bankruptcy will affect another court case.
For background on bankruptcy, start with How Bankruptcy Works.
What Happens If You Dont Include A Personal Injury Claim In Your Bankruptcy Petition
If youâve already filed a personal injury claim or you intend to do so, you must disclose this information on your bankruptcy petition. If you know it exists, you have to list the claim, even if you havenât filed a suit or even hired a personal injury lawyer yet. If you donât report this information and later decide to pursue a personal injury case against the at-fault party, the bankruptcy court could report this turn of events, leading your personal injury lawsuit to be dismissed.
Why? Personal injury claims are meant to compensate a victim for the monetary losses they have suffered as a result of the accident in question. If you ask the bankruptcy court to discharge debt you incurred as an injured party, the money youâre awarded from a personal injury suit isnât directly addressing these debts. This is why you have to disclose this information on your bankruptcy petition or youâll risk dismissal of a personal injury claim filed down the road.
What Happens If You Sue Someone And They File Bankruptcy
If you bring a civil case against someone and they file bankruptcy, your lawsuit is stopped by the automatic stay. Since the bankruptcy judge can sanction you for violating the automatic stay, itâs important that you stop your collection actions against that person.
Exception: Child support and related family court matters. As noted above, the automatic stay doesnât stop certain family court proceedings.
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If Your Property Has A Lien Against It
One thing you need to know is whether the creditor has a lien against your property. Depending on your state’s laws, the creditor may have been able to use the judgment to get a lien against your property, and in some states, the judgment creates a lien automatically.
A judgment lien works a lot like in the case of a mortgage or car loan where the house or car is used as collateral. It gives your creditor rights to your property, and it usually includes all of the property you own. A judgment lien is a powerful tool for creditors, but bankruptcy can sometimes counteract it.
In order to stop a judgment lien through bankruptcy, the original debt has to be dischargeable . Creditors do have the opportunity to ask the court to make other debts non-dischargeable, but this requires them to file adversary proceedings in bankruptcy court.
Even if the debt is dischargeable, the bankruptcy alone won’t discharge the creditor’s lien against your property. Getting the lien removed requires a separate step of filing a lien avoidance action with the bankruptcy court.
In order for the lien to be partially or wholly removed, you have to be able to show the court there is equity in the property affected by the judgment lien that you have a right to exempt in the bankruptcy. Then, only the property amount equal to what can be exempt is removed from the creditor’s judgment lien.
A Civil Judgment Can Grow After Its Entered
The costs, fees and sometimes the attorneys fees a creditor spends to collect a judgment get added to the judgment. Judgments accrue interest as well. In Washington, the statutory interest rate on judgments is 12%, even if no interest rate is listed. Often I see much higher interest rates included on default judgments up to 26% which can cause your debt load to grow rapidly.
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How Does A Bankruptcy Affect A Lawsuit
Often, I consult with prospective and existing clients who are involved in a lawsuit. Normally, their first question is exactly how a bankruptcy case affects a lawsuit. The answer to that question depends on several factors. First, it must be determined if the debtor is the plaintiff, i.e., the person bringing the lawsuit or the defendant, i.e., the person being sued. This is very important in the bankruptcy context. If the debtor is the plaintiff in a lawsuit, then normally the lawsuit can continue however, the existence of the lawsuit must be disclosed to the bankruptcy court.
Additionally, the bankruptcy trustee may also have to be joined as a party with the debtor or, in some cases, substituted as the plaintiff in place of the debtor. If the suit is seeking monetary compensation for the debtor, any amount that may be recovered may have to be paid to the bankruptcy trustee to be distributed to creditors of the debtor. Exactly how much of the total recovery that must be paid to the bankruptcy trustee frequently depends on the amount of debts owed and the amount of the recovery. There may be exemption laws that shield some or all of the recovery from the bankruptcy trustee but, these laws vary significantly from state to state. Therefore, it is crucial to have competent bankruptcy counsel in such circumstances.
Whats A Judgment Lien And Why Should I Care
A judgment is a court order. This court order can be turned into a judgment lien that can attach to real estate like your home. The process for this depends on state law. Judgment liens can turn your unsecured debt into a secured debt. A bankruptcy judge can make a judgment lien go away if the only real property you own is covered by an exemption.
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Does Bankruptcy Clear Lawsuit Debt
Generally speaking, yes. As long as the underlying debt is dischargeable, the lawsuit debt is dischargeable also. If the debt you got sued over was not dischargeable before, itâll still be nondischargeable once itâs reduced to a judgment.
Exceptions for Fraud
If the lawsuit was based on a claim of fraud or other bad acts, the lawsuit debt may not be dischargeable in bankruptcy. If youâre subject to a fraud complaint, your best bet is to get a knowledgeable bankruptcy lawyer to advise you on your best course of action.
Explore Your Bankruptcy Options
Get the financial relief you are entitled to by filing for bankruptcy protection. Our team represents individuals and small business owners in Chapter 7 and Chapter 13 bankruptcy cases. We can also provide help filing for Chapter 11 reorganization bankruptcy and Chapter 12 bankruptcy for family farmers and fishermen.
We can help you through the petition and filing process. We can help you retain your assets when you choose Chapter 7 bankruptcy. We can even help you restructure financial debt through other bankruptcy filings with complex financial structures or extremely large debt loads. Call Farmer & Morris Law, PLLC, at to speak to a member of our client intake team and learn what happens if you declare bankruptcy today.
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All You Need To Know About Bankruptcy Stay & Pending Litigation
When a trial date looms, bankruptcy may look better and better to a defendant.
Bankruptcy can be the emergency exit from a bad situation that is about to get worse.
Thats because every bankruptcy case comes with an automatic stay . Thats a federal court injunction automatically entered when a bankruptcy case is filed, protecting the debtor and his property.
What does that mean, really, when the stay is imposed while litigation is underway?
Can I File For Bankruptcy If Im Involved In A Lawsuit
Has a creditor filed lawsuit against you? Its a common misconception that a lawsuits or judgments are not discharged in bankruptcy. This isnt the case. In fact, bankruptcy can be an effective way to deal with debt even when a judgment or pending action is looming against you. Look at filing for bankruptcy when youre in this situation.
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Should I Answer The Complaint
The law presumes that if you dont answer the complaint, you agree with the contention of the lawsuit.
Consider answering the lawsuit if 1) you have a defense or 2) you want to buy time to consider your options.
Californians can find information about representing themselves in state law matters from the courts legal self help site.
When Does The Stay End
The automatic stay can end by court order or by operation of law. Creditors who want to start or continue with litigation against the debtor should seek relief from the stay by filing a motion with the bankruptcy court. One should also consider whether waiting for the stay to lift by operation of law may work just as well.
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Appointment Or Election Of A Case Trustee
Although the appointment of a case trustee is a rarity in a chapter 11 case, a party in interest or the U.S. trustee can request the appointment of a case trustee or examiner at any time prior to confirmation in a chapter 11 case. The court, on motion by a party in interest or the U.S. trustee and after notice and hearing, shall order the appointment of a case trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement, or if such an appointment is in the interest of creditors, any equity security holders, and other interests of the estate. 11 U.S.C. § 1104. Moreover, the U.S. trustee is required to move for appointment of a trustee if there are reasonable grounds to believe that any of the parties in control of the debtor “participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor’s financial reporting.” 11 U.S.C. § 1104. The trustee is appointed by the U.S. trustee, after consultation with parties in interest and subject to the court’s approval. Fed. R. Bankr. P. 2007.1. Alternatively, a trustee in a case may be elected if a party in interest requests the election of a trustee within 30 days after the court orders the appointment of a trustee. In that instance, the U.S. trustee convenes a meeting of creditors for the purpose of electing a person to serve as trustee in the case. 11 U.S.C. § 1104.
As discussed above, a trustee is appointed in each subchapter V case. 11 U.S.C. § 1183.
How A Judgment Or Lawsuit Works
A judgment is a court order that confirms that you owe a creditor a debt.
There are three basic steps in the judgment process:
A few other facts you should know about judgments and garnishments:
- you cant go to jail for not paying your debts
- certain income cannot be garnisheed including social assistance, employment insurance and both government and private pension
- in Ontario, a creditor can only garnishee up to 20% of your wages
- in contrast, a creditor can seize up to 100% of your bank account to enforce a judgment for outstanding debts.
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Can I File A Civil Suit Against Someone Who Filed Bankruptcy
Whether you can file a civil lawsuit against someone who has filed bankruptcy is a complex question with more than one answer. Standard procedure is that per federal law, any collection efforts must cease when someone files bankruptcy. Trying to collect a debt after being notified the debtor is filing bankruptcy can actually result in criminal penalties under federal law.
Those who are considering filing bankruptcy must file a document called “Suggestion of Bankruptcy” with the bankruptcy court. Based on this information, you cannot file a civil lawsuit after you receive this notification that a debtor plans to file bankruptcy. Filing this document gives debtors what is called an automatic stay from collection efforts. Even if you started the civil suit before the debtor filed the Suggestion of Bankruptcy, you must stop any further court proceedings regarding the suit.
If a creditor can prove the debt was obtained by fraud or false pretenses, the debt is not dischargeable in bankruptcy court. Non dischargeable means the debt will not be forgiven. The debtor will still be responsible to pay. If you think your case meets these criteria you can file what is called an Adversary Proceeding in bankruptcy court.
Other examples of debt that cannot be discharged include student loans and money owed to state or federal agencies. Examples of debts to agencies include federal fines, back ordered child support or alimony, and back taxes.
A Civil Judgment Creditor Can Use Local Law Enforcement To Collect
After winning a judgment, the creditor can file a write of garnishment and garnish wages, bank accounts or put a lien on your property. Additionally the creditor can schedule a supplemental hearing where they can make you show up in court and testify about your assets and their locations. If you dont show up for this hearing post judgment, a bench warrant can be issued for your arrest.
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What Is Lien Avoidance
Some judgment liens can be eliminated, or avoided in legal lingo, in the course of a bankruptcy. A judgment lien is avoided if it applies to property you claim as exempt from liquidation or forfeiture in your bankruptcy.
In a Chapter 7 bankruptcy, the debtor’s primary vehicle is exempt from liquidation or forfeiture if it’s worth less than your state’s exemption limit. Any judgment lien against an exempted vehicle you own free and clear can be wiped out through bankruptcy.
Note that this is distinct from any claim to the vehicle retained by the issuer of the loan used to purchase it. If you are still paying off a loan on the vehicle, bankruptcy may eliminate your obligation to cover delinquent payments on that loan, but the lender’s right to repossess the vehiclea form of lien that’s not dependent on a court orderstill stands, and you may still lose the vehicle.
In a Chapter 13 bankruptcy, it’s possible to avoid judgment liens against certain real estate holdings by claiming the real estate as exempt from consideration in the bankruptcy process. Doing so can be tricky, however, because it also eliminates any protection you may have against repaying outstanding debt owed on any mortgage on that property. Because of the potential complexity of claiming exemptions under Chapter 13, it’s wise to consult with your lawyer, and perhaps a real estate professional, when considering your options.
Do I Have To File Bankruptcy Before Theres A Judgment
First, remember that it takes weeks or even months from service of the actual lawsuit until the creditor actually has a judgment on which he can execute.
There are time periods prescribed in the law of each state which create the absolute minimum time periods required. In the real world, most institutional creditors, like credit card companies, dont move these suits forward with much urgency.
In general a debt represented by a judgment is just as dischargeable as the same debt prior to entry of judgment. Note, however:
- A judgment lien that attaches to assets is only avoidable by the debtor if it impairs an exemption. More about exemptions.
- If the complaint alleged fraud or other grounds that would make a debt non dischargeable in bankruptcy, entry of a judgment against you may prevent you from later contesting the facts .
- In the case of debts that are unliquidated , a judgment will liquidate the debt: that may have the effect of increasing your debts beyond the eligibility requirements of Chapter 13, with its expanded discharge and inexpensive reorganization possibilities.
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Where Do Judgments Come From
There are a variety of ways judgments can be rendered against you in response to creditor litigation or other legal actions.
- A confession of judgment is a document in which you acknowledge liability for the debt. Creditors often require you to sign one as a condition of entering a repayment plan, with the understanding that they will use it to secure a judgment if you don’t stick to the plan.
- A judgment by default is the result of you failing to respond to a creditor’s lawsuit.
- A judgment by consent occurs when you respond to a creditor’s suit by accepting responsibility for the debt.
- A judgment after trial occurs when you and your creditor argue your case before a court, and the court finds you liable for the debt.
When you file for bankruptcy, holders of judgments against you are required to stop efforts to collect what you owe them, so any wage garnishments or collections from bank accounts must cease. Any pending lawsuits seeking judgments against you are also suspended, and typically dismissed or withdrawn upon completion of the bankruptcy process.