When someone breaks a contract or injures you in some way, you can file a lawsuit asking for money to reimburse your loss. But, you might be out of luck if the person you want to sue files for bankruptcy. Whether you can sue will depend on the type of issue involved and the date of the incident.
Bankruptcy Stops Most Lawsuits
When someone files a bankruptcy case, a court order called the automatic stay immediately goes into effect. 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. The stay's power includes stopping many types of lawsuits cold.
But the automatic stay has limitations. It only ends litigation involving debts that can be forgiven (discharged) in the bankruptcy case. Other types of court proceedings can continue to move forward.
You won't be able to file or continue with a lawsuit if the damage occurred before the bankruptcy filing and relates to one of the debts below:
- credit card balances
- personal loans
- most business debts
- debt arising from an accident (except for those that result in bodily injury or death due to intoxication)
- medical bills
- utility bills
- unpaid rent, or
- a car loan or mortgage foreclosure.
(Learn more in Will a Pending Lawsuit Go Away If I File for Bankruptcy?)
The automatic stay doesn't prevent you from filing or continuing with all court proceedings, however. For instance, some court cases:
- don't involve debts
- concern nondischargeable debts, or
- involve a legal right that won't arise until after the bankruptcy filing.
Below you'll find examples of obligations that fall into each of these categories.
Actions not related to the debtor's debts or property:
- Criminal prosecutions. Filing bankruptcy won't stop a criminal case.
- Divorce and child custody. Child custody cases and marriage dissolution matters will not be directly affected by a bankruptcy. The same is true for restraining orders and "peace bonds." But, when a divorcing couple is ready to divide property, the bankruptcy court might have the jurisdiction to approve the property division when it concerns assets also involved in the bankruptcy case.
Lawsuits involving debt that won't be discharged in the bankruptcy:
- Fraud. If you're a victim of fraud and bring a lawsuit for relief, you might be able to file or continue the lawsuit during the bankruptcy case. Many debts that arise from fraud aren't discharged in bankruptcy if the bankruptcy court or a state court determines the debt arose from fraud. (Learn about bankruptcy adversary proceedings.)
- Some personal injury cases. The bankruptcy won't discharge a debt if the debtor caused death or injury while intoxicated. The bankruptcy court will usually allow this type of lawsuit to continue or be filed to determine if the debtor was intoxicated.
Debt that arising after the bankruptcy filing:
- Car accident. Two months after the debtor filed a bankruptcy case, the debtor caused an accident that totaled your car.
- New debt. Three months after filing for bankruptcy, the debtor asked you for a loan but failed to pay it back.
In both of these cases, you can file a lawsuit because the incident took place after the debtor filed the bankruptcy case.
Bankruptcy and State Court Lawsuits
If the lawsuit was already pending when the debtor filed the bankruptcy case—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:
- dismiss the lawsuit
- ask the bankruptcy court for permission to continue the state court suit, or
- move the lawsuit to the bankruptcy court.
If the debtor filed for bankruptcy before the filing of a lawsuit, the parties can:
- file an adversary proceeding (a lawsuit filed in the bankruptcy court that is related to but separate from the bankruptcy case), or
- bring the action in another court after first getting permission from the bankruptcy court.
(Learn more by reading What Types of Bankruptcy Cases Must Be Filed as an Adversary Proceeding?)