No one wants to be sued, to say the least. Fortunately, filing for bankruptcy can stop some legal actions in their tracks, including a common type—the civil debt collection action. Other legal matters, however, such as a criminal or child support action, will continue to proceed even after filing a bankruptcy case.
(To learn how bankruptcy can help you avoid a lawsuit, read Will a Pending Lawsuit Go Away If I File for Bankruptcy?)
Filing for bankruptcy can be very powerful, primarily because of an order called the automatic stay. The stay stops creditors from engaging in debt collecting actions, including pursuing a lawsuit.
However, some lawsuits aren’t affected by a bankruptcy filing. Here are some examples of litigation that you’ll have to continue to address, despite your bankruptcy. (Keep in mind that if a creditor or landlord already received a judgment, the lawsuit is no longer pending. This article doesn’t pertain to suits that have already resolved.)
A criminal case will proceed despite the automatic stay. Why? Because the prosecution of an alleged violation of law—such as assault and battery matter or driving on a suspended license—isn’t related to the debt problems of a debtor (the person who owes money in bankruptcy). Therefore, the matter isn’t something that the bankruptcy court can handle. It isn’t within the court’s jurisdiction.
However, you won’t want to confuse a criminal case with a civil action brought by a government entity to recover money. The automatic stay will likely stop the civil lawsuit because it pertains to a matter over which the bankruptcy court does have jurisdiction—a debt that you owe. This situation can arise if the suit involves:
If you’re not sure what type of case you’re facing, look to the consequences. If a conviction brings incarceration or the loss of a right, such as your driver’s license, or a fine to punish you, it’s likely a criminal matter. If you stand to lose money to reimburse accidental damage you caused to property or a person, you’re probably dealing with a civil case. If you’re unsure, speak with a knowledgeable bankruptcy attorney.
A bankruptcy filing won’t stop a divorce proceeding. Similarly, the bankruptcy court won’t get involved in a family court’s determination regarding the amount of alimony or child support someone should pay. However, a Chapter 13 bankruptcy can wipe out a property division settlement. If you’re dealing with this complicated area, you should seek advice from an attorney who understands how bankruptcy and family law intersect.
In most cases, a lawsuit will fit into one of the distinct categories described above, which is helpful because it will allow you to predict what will happen with the case. However, in some matters, the bankruptcy judge or the bankruptcy trustee (the official responsible for managing your case) will take a larger part in deciding what will happen to the suit.
If you have the right to file a lawsuit (or have already filed one), someone likely owes you money, and you’d like reimbursement. Perhaps you were injured in an accident, or a former business partner never paid you an agreed contractual amount, or you’re a member of a class action lawsuit. Whatever it might be, the award that you’re potentially entitled to receive is considered an asset in the bankruptcy case. You’ll have to be able to protect (exempt) your money judgment. Otherwise, you won’t be able to keep it.
If you can’t exempt an award, the Chapter 7 bankruptcy trustee will decide whether to take over the case, litigate it on your behalf, and distribute any proceeds to the creditors. By contrast, in a Chapter 13 bankruptcy, you’d likely continue to pursue the action and then turn over any nonexempt proceeds to creditors as part of the repayment plan.
A person (or business) involved in any lawsuit can ask the bankruptcy court to allow the matter to proceed. The court will probably grant the motion if doing so won’t affect the bankruptcy case, and the moving party will suffer harm otherwise.
The request, which can be made by filing a motion to lift the automatic stay, commonly occurs when:
If the creditor fails to make the motion, the automatic stay will remain in place, and the lawsuit won’t be able to move forward until after the bankruptcy case is over. However, if the underlying debt was discharged in the bankruptcy, the lawsuit will go away, as well.