Does Bankruptcy Stop a Lawsuit?

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Bankruptcy can eliminate debt, stop creditors, and give you a new lease on life, but can it stop a lawsuit? Keep reading to find out.

Bankruptcy Basics

Individuals or businesses can file for Chapter 7. Only individuals can file for Chapter 13 bankruptcy. Chapter 7, or liquidation, is a type of bankruptcy where the debtor’s non-exempt assets are liquidated to create funds to pay back the creditors. A court-appointed trustee oversees the liquidation process and helps the debtor pay off their debts. Any debts remaining after liquidation of non-exempt assets are discharged. Certain types of debt cannot be discharged.

Chapter 13 does not involve liquidation. Instead, the court allows the debtor to reorganize their debt and create a repayment plan. The plan must be reasonable and achievable within three or five years. Any debts which remain unpaid upon the completion of the court-approved plan, are discharged. Certain types of debt cannot be discharged.

Once a person files for bankruptcy, an automatic stay is implemented to prevent collection activity from happening. This means that creditors cannot continue to pursue the money they are owed while the automatic stay is in effect. Automatic stays prevent a situation where once creditor gets a disproportionate amount of the debtor’s funds. Instead, the court will use those funds appropriately. REMOVE THESE TWO SENTENCES

Pending Lawsuits

Some pending lawsuits may stop after filing for bankruptcy, but only if it involves civil matters outside of family or criminal law. Essentially, the automatic stay prevents creditors and those trying to win a money judgment from continuing their collection activity. Once the stay is in place, the court must decide how the debtor’s funds are distributed.

In general, nondischargeable debts include court-ordered payments, student loans, and certain taxes. If the debtor is in the middle of a criminal lawsuit, divorce, or child custody dispute, the automatic stay will not stop the suit from moving forward.

Bankruptcy can stop the following lawsuits during an automatic stay:

  • Breach of contract
  • Credit card balances
  • Compensation for negligence (accidents, injuries, etc.)
  • Deficiency balances
  • Financial disputes between business partners
  • Home foreclosure

In most cases, the court will handle the underlying debt, and the lawsuit will become irrelevant. Unless unique circumstances prevent the court from stopping the case, these lawsuits are not likely to withstand bankruptcy.

Special Circumstances

Sometimes a creditor may make a formal request to the court to lift the automatic stay so the lawsuit can move forward. The court would rarely approve a request, especially if it drained the debtor’s funds to pay back their other creditors. REMOVE THIS SENTENCE

The judge may lift the automatic stay if:

  • The final outcome of the lawsuit will not affect the bankruptcy case, and/or the creditor will face financial harm if the suit is stayed.
  • The lawsuit will solve an issue within the bankruptcy case. For example, if there are allegations of fraud, the lawsuit may be allowed to proceed if it addresses the issue of fraud and determine whether it is dischargeable. It is also easier to allow an existing case to continue than forcing the litigants to restart the lawsuit in bankruptcy court.

The suing party may also request the court to continue the lawsuit. If there are regulatory concerns or the case comes from a government agency in charge of enforcement, the court may let the case stand.

Takeaway

Bankruptcy can eliminate some lawsuits depending on the nature of the case. If the suit solves a problem brought up in bankruptcy court or involves enforcement action, the court could potentially let the case stand. Criminal and family court cases are not dischargeable during bankruptcy and must continue regardless of how the outcome affects the debtor.

Peace of Mind

Bankruptcy has many benefits in addition to debt relief. However, without the right help and planning, you could put yourself in a worse situation than before you filed.

At Buchalter & Pelphrey Attorneys At Law, we believe that a debt-free future is possible. Our firm offers a variety of bankruptcy and asset protection services in addition to guidance related to tax law and foreclosure. With over 50 years of experience, we have the knowledge you need to pursue financial security. Let our family help yours.

Schedule a free initial case evaluation with Buchalter & Pelphrey Attorneys At Law today!
Let Our Family Help Yours!

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