Lawsuits You Can't Stop By Filing for Bankruptcy

Find out what happens to lawsuits when you file for bankruptcy and learn which lawsuits can't be stopped by a bankruptcy filing.

By , Attorney

No one wants to be sued. Fortunately, filing for bankruptcy stops many legal actions in their tracks, including debt-collection lawsuits. But filing for bankruptcy won't stop all legal matters. Some lawsuits, such as criminal prosecution or child support actions, will continue even after your bankruptcy filing.

Here's what you'll want to know if you're involved in litigation and considering bankruptcy:

  • how bankruptcy stops lawsuits
  • which lawsuits bankruptcy won't stop, and
  • when a bankruptcy court will let a lawsuit finish in state court.

If you already have a lawsuit judgment against you, this article won't help. Instead, find out what happens to lawsuit judgments in bankruptcy here.

Why Filing for Bankruptcy Stops Some Lawsuits But Can't Stop All Lawsuits

Filing for bankruptcy can be very powerful, primarily because of the automatic stay order the bankruptcy court puts in place when you file your bankruptcy case. The stay stops creditors from collecting debts from you, including debt collection actions involving lawsuits.

But before your debt problems can be resolved in bankruptcy, everyone claiming you owe them money must be part of the bankruptcy case, including people suing you for money in state court. That's why bankruptcy stops civil collection actions.

Some of the lawsuits bankruptcy will stop include:

  • unpaid credit card debt, back rent, or lease payment cases
  • civil personal injury and property damage cases, and
  • disputes between business partners.

If bankruptcy "discharges" or wipes out the lawsuit debt, the case won't continue after your bankruptcy case ends. However, some lawsuits aren't affected by bankruptcy.

Lawsuits Bankruptcy Can't Stop

Here are examples of litigation that will continue moving forward despite your bankruptcy filing.

Family Support Cases

From a practical standpoint, most people file for bankruptcy before or after a divorce, and with good reason. Filing for bankruptcy during a divorce creates havoc in both processes, so lawyers rarely advise doing it. Here's why.

A Chapter 7 bankruptcy filing will stop the property division portion of a divorce proceeding because the Chapter 7 trustee appointed to the case must sell nonexempt property for creditors in a Chapter 7 case. Nonexempt property consists of assets you can't protect with a bankruptcy exemption.

However, the bankruptcy court won't get involved in a family law court's determination of the amount of alimony or child support someone should pay. Those actions will continue.

If you're dealing with this complicated area, you should seek advice from an attorney who understands how bankruptcy and family law intersect.

Criminal Actions

A criminal case will proceed despite the automatic stay. Why? Because the prosecution of an alleged violation of the law, such as an assault and battery matter or driving on a suspended license, isn't related to the bankruptcy filer's debt problems. Criminal cases aren't within the court's "jurisdiction" because they don't involve a legal area the bankruptcy court has the authority to handle.

Lawsuits that a Bankruptcy Filing Might or Might Not Stop

A lawsuit's outcome isn't always predictable. In some instances, the bankruptcy judge or the trustee will play a more significant part in deciding what will happen to the suit.

When a Creditor Can Lift the Automatic Stay

A person or business involved in any lawsuit can ask the bankruptcy court to allow the matter to proceed. A bankruptcy court will grant the motion when it won't affect the bankruptcy case, and the person requesting the relief will suffer harm if the motion isn't granted.

The request can be made by filing a motion to lift the automatic stay when:

  • A mortgage lender would lose money if forced to wait to foreclose until after the bankruptcy case ends.
  • The debtor is surrendering a financed car, and the lender wants to limit losses by repossessing the vehicle.
  • A landlord is evicting a tenant but hasn't received an eviction order or judgment.
  • A government agency wants approval from the bankruptcy court to move forward with a lawsuit to avoid violating the automatic stay.

The automatic stay will remain in place if the creditor fails to make the motion.

When the Lawsuit Starts as a Fraud Case in State Court

Here's another wrinkle. In many fraud cases, the plaintiff files the lawsuit in state court, but the lawsuit is stopped by the automatic stay after the "defendant" or the person sued files for bankruptcy. Because a plaintiff must prove fraud in a court of law before the bankruptcy court will declare the debt nondischargeable, the bankruptcy case will wipe out the debt if the plaintiff does nothing.

The plaintiff can refile the state lawsuit as an adversary proceeding in bankruptcy court, but starting over is expensive. Instead, plaintiffs often ask for permission to finish the civil fraud case in state court. Many bankruptcy courts agree to adopt the state court's decision and declare the debt nondischargeable if the state court finds fraud.

When the Bankruptcy Trustee Will Take Over the Lawsuit

If you have a right to sue someone, the potential money judgment you'd receive is an asset in your bankruptcy case. You can keep your right to sue and remain in charge of the lawsuit if you can protect it with a bankruptcy exemption. However, if you can't exempt it, the Chapter 7 bankruptcy trustee will decide whether to take over the case, litigate it on your behalf, and distribute any proceeds to creditors.

You might face this situation after being injured in an accident, when you're owed money under a contract, or if you're part of a class-action lawsuit.

Filing Bankruptcy After Losing a Lawsuit

You can declare bankruptcy after losing a lawsuit and wipe out the judgment, but postponing bankruptcy until after a loss will increase your risk of losing money and property because:

  • Bankruptcy law doesn't eliminate all judgments.
  • Your creditor could put liens on your property and seize assets immediately after receiving the judgment.

Although you can wipe out most money judgments a creditor would get after beating you in court, you'll be stuck with judgments related to fraud, willful harm, DUIs, and other nondischargeable debts.

You'd stand a better chance of eliminating or "discharging" the debt by filing for bankruptcy immediately after being served with the suit and forcing the creditor to refile the lawsuit in bankruptcy court. Many creditors won't bother.

Even if the money judgment is the type you can erase in bankruptcy, you could lose assets fast and probably won't recover them. Savvy creditors will be ready to levy on your bank account, seize property, and put liens on assets soon after receiving the money judgment.

Once a creditor has a judgment lien on your property, you'll have to spend money on lien-lifting motions to remove them, and your recovery will be limited to your state's "bankruptcy exemption" amount. Learn about getting rid of judgment liens in bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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