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 cold. Even so, a bankruptcy case won't stop every action you might face. In this article, you'll learn:

• how bankruptcy stops civil lawsuits
• lawsuits you can and can't stop by filing for bankruptcy, and
• what to expect if you file for bankruptcy while being evicted.

If you're dealing with an eviction, you'll want to act quickly. Start by reading about evictions and the automatic stay in bankruptcy.

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How Does Bankruptcy Stop a Civil Lawsuit?

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

The stay ensures creditors don't get an unfair share of the debtor's available funds. Freezing the collection action gives the court time to sort out the available assets and divide them appropriately among all creditors.

What Types of Lawsuits are Not Stopped by Filing Bankruptcy?

Bankruptcy doesn't help people avoid all legal actions. Here are a few matters that will continue despite a bankruptcy case:

• 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.)

The automatic stay will stop most other lawsuits.

What Types of Civil Lawsuits Will Bankruptcy Stop?

Bankruptcy affects your debts and assets. Therefore, the bankruptcy court will have jurisdiction over (the right to decide) any case involving an allegation that you owe money because you either failed to pay a debt or harmed someone somehow.

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 (see below for an explanation of the special rules that govern evictions.)

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.

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. Bankruptcy courts regularly approve such motions 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), or
• the lawsuit will decide an issue that must be resolved in the bankruptcy case (for instance, it would be necessary to resolve an allegation of fraud to determine whether a debt will be wiped out, or "discharged," in the bankruptcy), and it would be costly to ask litigants to start litigating anew in the 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 the clean-up of a toxic site, might delay the case and, in an abundance of caution, file a motion to lift the automatic stay before continuing to prosecute the matter.

Filing Bankruptcy After Losing a Lawsuit

It's always better to file a bankruptcy case before the lawsuit is over. For instance, you'd want to do so for the following reasons:

• to prevent the creditor from getting a judgment lien on your property, or
• from securing a fraud judgment against you, making it virtually impossible to discharge the debt in a bankruptcy case.

However, even if you lose the lawsuit, you can still file a bankruptcy case. 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.

Bankruptcy will also stop the government's attempt to revoke your driver's license or occupational license because you failed to pay traffic tickets or other required fees. For more details, see Lawsuits You Can't Stop By Filing for Bankruptcy.

When Can a Bankruptcy Stop an Eviction?

When a tenant files bankruptcy, landlords find it relatively easy to proceed with eviction. But landlords must still abide by rules that respect the tenant's rights.

Because the windows for action are short and the rules aren't easy to implement, if you're in this situation as a landlord or a tenant, it's best to consult with a knowledgeable attorney.

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 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'll have to deposit the rent that will come due within 30 days with the bankruptcy court. You'll have 30 days to verify you paid the landlord the past due rent. Learn more about evictions in bankruptcy and how the automatic stay can help or hinder them.

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.