Will a Pending Lawsuit Go Away If I File for Bankruptcy?

After being served with a lawsuit, many people file for bankruptcy, and with good reason. Bankruptcy will stop many legal actions. Even so, a bankruptcy case won't stop every action you might face. In this article, you'll learn how bankruptcy stops civil lawsuits, which lawsuits you can't stop by filing for bankruptcy, and what to expect if you file for bankruptcy while being evicted.

All lawsuits, but especially evictions, require fast action. Read about evictions and the automatic stay in bankruptcy, or contact a bankruptcy lawyer.

What Types of Lawsuits Aren't Stopped By Bankruptcy?

Bankruptcy doesn't help people avoid all legal actions. Although the automatic stay will stop most lawsuits (especially those involving creditor money judgments), some matters will continue despite a bankruptcy case. For instance, bankruptcy won't provide relief in criminal cases, divorce and dissolution actions, child custody and support cases, and most evictions after the state court granted the landlord possession (see below for an exception).

What Types of Civil Lawsuits Will Bankruptcy Stop?

Because bankruptcy affects your debts and assets, lawsuits by someone alleging that you owe them money because you injured them, damaged their property, or didn't pay a debt will be part of the bankruptcy. A few examples include cases involving:

• a credit card balance,
• money sought for a breach of contract,
• a financial dispute between business partners,
• compensation for a negligence-related (accidental) personal injury case, such as a traffic accident,
• a home foreclosure,
• the collection of a deficiency balance (the amount still owing after a property auction), or
• an eviction, if the state court has not yet issued the order for possession (more below).

In almost all of these situations, the bankruptcy "discharge" order that wipes out qualifying debt will eliminate the underlying debt, and the court case will go away. But not always. Sometimes the court allows the creditor to pursue an action.

How Bankruptcy Stops a Civil Lawsuit

When a "debtor" or the person owing debt files a bankruptcy case, an automatic stay order prevents creditors from continuing any collection activity, including attempts to win a money judgment in a civil lawsuit.

The stay ensures creditors don't receive an unfair share of the debtor's available funds. Freezing the collection action allows the court to determine the available assets and divide them appropriately among all creditors.

Getting Permission to Pursue the Lawsuit

In any action, the creditor can ask the bankruptcy judge to lift the automatic stay and allow a state lawsuit to proceed, and such requests are often granted under the right circumstances. Bankruptcy courts regularly approve such motions in eviction and foreclosure cases, as well as in the following situations:

• The outcome won't affect the bankruptcy case, and the creditor faces financial harm (for instance, a home lender stands to lose more money the longer it must wait to foreclose on a home that has no equity).
• The lawsuit will decide an issue that must be resolved in the bankruptcy case (for instance, an allegation of fraud must be resolved to determine whether a debt will be wiped out or discharged in bankruptcy), and it would be costly to ask litigants to start anew in bankruptcy court.

In some cases, the suing party might have the right to continue the case, but will ask permission from the court before doing so. For instance, a governmental agency pursuing an enforcement action, such as cleaning up a toxic site, might delay the case and, out of an abundance of caution, file a motion to lift the automatic stay before proceeding with the matter.

Filing Bankruptcy After Losing a Lawsuit

When possible, it's usually better to file a bankruptcy case before a lawsuit against you ends. This strategy can prevent the creditor from getting a judgment lien on your property, which can be hard to remove. It can also avoid a fraud judgment from being entered against you, which could prevent you from discharging the debt in bankruptcy.

However, you can still file a bankruptcy case even if you lose the lawsuit. The automatic stay will stop a creditor's attempts to collect most money judgments. This is true even if there's a garnishment against your paycheck or bank account.

The bankruptcy will also temporarily stop a creditor's attempt to sell your property to satisfy a judgment. However, you'll need to address the judgment lien in bankruptcy to prevent collection after the bankruptcy case.

Using Bankruptcy to Stop an Eviction

When a tenant files for bankruptcy, landlords find it relatively easy to proceed with eviction. However, landlords must still abide by rules respecting tenant rights. Because the time frames for action are short and the rules aren't easy to implement, it's best to consult a knowledgeable attorney if you're a landlord or tenant.

Before the Eviction Court Issues an Eviction Judgment

If you file for bankruptcy before the eviction court finds it in the landlord's favor by issuing an order for possession or eviction judgment, the automatic stay goes into effect to stop the eviction. However, you might have to ask the court to put the automatic stay in place if you had bankruptcy cases pending in the last year.

But the automatic stay won't last long if the eviction alleges that you're endangering the property or using illegal drugs. In that case, the landlord can file a certification with the court and proceed with the eviction. You can object to the certification, but you'll have to attend a hearing and convince the bankruptcy court that the landlord is wrong.

After the Eviction Court Issues an Eviction Judgment

Filing for bankruptcy won't stop an eviction if the landlord has already obtained an order of possession or an eviction judgment from the state court. However, a few states allow you to catch up or "reinstate" the rent after the eviction court issues the order for possession.

But you must act quickly. You must deposit the overdue rent with the bankruptcy court within 30 days. You'll then have 30 days to verify you paid the landlord the past-due rent.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. For instance, Nolo articles will explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.