Kara Sears
If you're facing a lawsuit, you may be considering filing for bankruptcy to stop it. Bankruptcy can help you manage overwhelming debt and protect yourself from further legal action. It's important to note that bankruptcy is not a permanent solution, and it's best to consult a knowledgeable attorney to discuss your options and decide if bankruptcy is the right choice for you. Depending on the type of bankruptcy you file for, you may still be liable for certain debts, and there are some lawsuits that bankruptcy can't stop. However, bankruptcy can provide immediate relief and a fresh financial start by pausing or stopping most collection actions and lawsuits.
Can you file bankruptcy on a lawsuit?
| Characteristics | Values |
|---|---|
| Can you file bankruptcy after a lawsuit? | Yes, it is possible to file for bankruptcy after a lawsuit. |
| Can bankruptcy stop a lawsuit? | Yes, filing for bankruptcy can put a hold on a lawsuit or stop it altogether, depending on the case. |
| What are the types of bankruptcy? | Chapter 7 and Chapter 11 bankruptcy. |
| What does bankruptcy do? | Bankruptcy can erase certain debts, such as credit card balances, and will stop most collection actions. |
| What are the limitations of bankruptcy? | Bankruptcy does not protect individuals from all legal action. For example, it does not stop eviction proceedings if the landlord has already obtained an eviction judgment. |
| What is the process of filing for bankruptcy? | To file for bankruptcy, individuals must fill out court-required forms, pay court fees, and present the forms in person to the bankruptcy court clerk. |
| When is the best time to file for bankruptcy? | It is recommended to file for bankruptcy before a judgment is issued to avoid consequences and further damage to one's credit score. |
| What are the alternatives to bankruptcy? | Individuals can choose to fight the lawsuit if they believe the creditors have no valid grounds for legal action. |
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What You'll Learn
Filing for bankruptcy after losing a lawsuit
If you have lost a lawsuit, you may be able to file for bankruptcy to protect yourself from further legal action and manage overwhelming debt. This is true even if there is a garnishment against your bank account or paycheck. Filing for bankruptcy can also stop an eviction or foreclosure, but only if you file your bankruptcy case before the eviction court issues an eviction judgment.
When you file for bankruptcy, an automatic stay goes into effect, which prevents creditors from continuing their collection activities. This includes attempts to obtain a money judgment in a lawsuit, wage garnishment, and bank levies. The automatic stay also gives the court time to evaluate your assets and ensure they are adequately divided among each creditor. However, it is important to note that bankruptcy does not protect you from all legal action, and there are some exceptions to which cases allow for an automatic stay. For example, bankruptcy will not stop criminal cases, proceedings to establish paternity, or matters involving child custody and visitation.
To file your bankruptcy claim, you will need to fill out all court-required forms, pay all court-required fees, and present all forms in person to the bankruptcy court clerk along with your bankruptcy petition. Working with a seasoned bankruptcy lawyer can help ensure that your bankruptcy case is strong and goes smoothly.
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The automatic stay
However, it is important to note that the automatic stay is not a permanent solution. It is a temporary measure that allows bankruptcy courts to assess the debtor's available assets and distribute them among creditors. The automatic stay can be terminated in two situations: when the property in question is no longer part of the estate, and when the bankruptcy case is closed or dismissed, or a discharge is granted or denied.
Additionally, there are some exceptions to the automatic stay. It does not apply to criminal proceedings, paternity establishment, child support and alimony modifications, child custody matters, or actions based on post-petition events. In these cases, creditors can petition the bankruptcy court to lift the automatic stay and allow legal proceedings to continue.
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Bankruptcy exemptions
When a bankruptcy case is filed, an automatic stay injunction is triggered, which prevents creditors from collecting debts or enforcing judgments. This includes lawsuits, where the automatic stay can pause or stop the proceedings. However, bankruptcy does not protect debtors from all legal action, and certain types of lawsuits, such as criminal cases, are exempt from the automatic stay.
The federal bankruptcy exemptions, outlined in Bankruptcy Code § 522(d), allow debtors to protect a certain amount of their equity in their homes, cars, household goods, and retirement accounts. These exemption amounts are adjusted for inflation every three years, with new amounts taking effect on April 1, 2025.
In addition to these federal exemptions, some states have their own exemption laws. It is important to review your state's exemption laws to understand which assets you may be able to protect during bankruptcy.
Debtors have the option to choose between the federal exemptions and the exemptions provided by their state, as per 11 U.S. Code § 522. This code also allows debtors to convert nonexempt property into exempt property before filing for bankruptcy, enabling them to make full use of the available exemptions.
It is worth noting that certain assets, such as retirement funds in pension plans and individual retirement accounts, are protected even in "opt-out" states where federal exemptions do not usually apply.
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Fighting the lawsuit
Fighting a lawsuit is one option to consider when facing legal action. If you truly believe that the creditors have no valid reason for suing you and you can prove their claim is unfounded, then fighting the lawsuit might be a good strategy. However, if they can prove you owe them money, there may not be many legal defences available, and fighting it could end up costing you more in the long run.
If you choose to fight, you can also sue the plaintiff or another defendant if you believe they are at fault or owe you money. This is called a cross-complaint, and it means you are suing someone else for a related reason in the same case. You can also bring someone who is not currently part of the lawsuit into it if you think they are responsible. If you don't take this step, you may lose your chance to sue them later.
You should always respond to a lawsuit by the deadline. If you don't, the plaintiff can ask the judge to make a decision without your input, which is called a default or default judgment. Even if there is a default, you can still try to reach an agreement with the plaintiff, and you may be able to cancel (set aside) the default judgment if you have a good reason for not responding. For example, if you didn't receive the papers that started the lawsuit or were unable to respond due to hospitalisation or military service.
At any point, even if you have already filed a response, you can try to reach an agreement with the other side. If you agree, you can get an extension on your deadline to respond, and you can agree to have the case dismissed once you've fulfilled your end of the agreement.
Bankruptcy is often considered when facing a lawsuit because it can put a hold on a lawsuit or stop it altogether, depending on the case. If the lawsuit concerns money or property, bankruptcy may cause the lawsuit to be discontinued. If it involves other civil matters, it may place a temporary pause on the proceedings.
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Consulting a bankruptcy attorney
Initial Consultation
Many bankruptcy attorneys offer a free initial consultation to understand your case and provide an overview of your options. During this consultation, be prepared to discuss your financial situation, including your assets, liabilities, and the nature of your lawsuit. It is essential to be honest and provide accurate information to receive the best advice.
Choosing the Right Attorney
When selecting a bankruptcy attorney, look for someone with experience and expertise in bankruptcy law. Consider their track record, certifications, and recognition in the field. Check if they have published articles or are in demand as speakers at bankruptcy conferences, as these are indicators of their expertise. Ensure they have a good understanding of the latest rulings and interpretations of bankruptcy law, as it is a constantly evolving field.
Understanding Your Options
A good bankruptcy attorney will advise you on the different types of bankruptcy, such as Chapter 7 or Chapter 13, and explain which option is best suited to your situation. They will also inform you of any alternatives to bankruptcy, such as debt settlement or management programs, if these are more appropriate for your case.
Paperwork and Court Representation
The attorney will handle the necessary paperwork for filing bankruptcy, ensuring it is completed correctly and filed with the court. They will also represent you when your case goes to court, providing crucial support and guidance throughout the process.
Protecting Your Assets
One of the essential roles of a bankruptcy attorney is to protect your assets from debt collectors. They will be familiar with your state's bankruptcy exemption laws and work to safeguard your property, such as your home, car, or other valuable possessions, to the extent possible under the law.
Peace of Mind
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Frequently asked questions
Yes, you can file for bankruptcy at any stage of a lawsuit, even after losing a case in court and receiving an order for judgment. However, it is generally easier to file for bankruptcy while a civil lawsuit is still ongoing.
Filing for bankruptcy may put a hold on a lawsuit or stop it altogether. If the lawsuit concerns money or property, it may be discontinued. If it involves other civil matters, it may be paused or suspended. Once you file for bankruptcy, an automatic stay goes into effect, which prevents creditors from attempting to collect money through a lawsuit judgment. This is only a temporary solution, however, and does not apply to every case.
Filing for bankruptcy is not always the best option. It should only occur when the debtor who has been sued genuinely cannot afford to pay off their creditors. There can be consequences if you wait to file for bankruptcy after receiving a judgment, and it may be more difficult to discharge the debt. Bankruptcy will not get rid of a judgment lien, and you will still be liable for certain debts after the bankruptcy case closes.
You can choose to fight the lawsuit if you believe the creditors have no valid grounds for legal action. You can also try to negotiate with the creditor or debt collector to settle the debt.
