When someone breaks a contract or injures you in some way, you can file a lawsuit asking for money to reimburse you for your loss. But you might be out of luck if the person you want to sue files for bankruptcy. Your ability to move forward will depend on the type of issue you have with the debtor (the person who files a bankruptcy case) and when the incident occurred.
When someone files a bankruptcy case, an injunction (a type of court order) called the automatic stay is activated immediately. The stay stops a creditor’s attempt to collect a debt from the debtor. For instance, a creditor must stop calling the debtor, as well as sending bills—it will even stop a lawsuit in its tracks.
But the automatic stay has limitations. It will only put an end to litigation involving debts that can be forgiven (discharged) in the bankruptcy. Some other types of court proceedings can continue.
You won’t be able to continue a lawsuit (or file one) if the debt was owed before the bankruptcy filing and the amount owed relates to one of the debts on the list below:
(Learn more in Will a Pending Lawsuit Go Away If I File for Bankruptcy?)
The automatic stay doesn’t prevent you filing or continuing all court proceedings, however. For instance, some court cases have nothing to do with debts, some deal with debts that aren’t dischargeable in bankruptcy, and some legal rights won’t arise until after the filing of the bankruptcy case. Below you’ll find examples of obligations that fall into each of these categories.
Examples of actions that aren’t related to the debtor’s debts or property:
Examples of lawsuits involving debt that won’t be discharged in the bankruptcy:
(To learn more about which debts are excepted from discharge automatically and which debts require a decision from the bankruptcy court, visit Nondischargeable Debts in Chapter 7 Bankruptcy.)
Examples of debt that might not be involved in the bankruptcy matter because it arises after the bankruptcy filing:
In both of these cases, you can file a lawsuit because the incident took place after the debtor filed the bankruptcy case.
If the lawsuit was already pending when the bankruptcy case was filed—and it pertains to an issue other than a debt that will be discharged in the bankruptcy, as discussed above—the parties have the option of choosing how to go forward. They can:
If the debtor filed for bankruptcy before the filing of a lawsuit, the parties can:
(Learn more by reading What Types of Bankruptcy Cases Must Be Filed as an Adversary Proceeding?)