After being served with a lawsuit, many people file for bankruptcy, 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 affects pending legal cases, including evictions.
When a debtor (the person owing debt) files a bankruptcy case, an order called the automatic stay goes into effect. The automatic stay prevents creditors from continuing any collection activity, including attempts to win a money judgment in a civil lawsuit. The stay ensures that the creditor who has sued doesn'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.
Bankruptcy doesn't help people avoid all legal actions. Here are a few matters that will continue despite a bankruptcy case:
The automatic stay will stop most other lawsuits.
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 in some way.
A few examples include cases involving:
In almost all of these situations, the underlying debt will be eliminated in the bankruptcy and the court case will go away. But not always. Sometimes the court allows the creditor to pursue an action.
In any action, the creditor can ask the bankruptcy judge to lift the automatic stay so that the lawsuit can proceed. Bankruptcy courts regularly approve such motions in the following situations:
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.
While it's usually better to file a bankruptcy case before the lawsuit is over, if you lose the lawsuit, you can still file a bankruptcy case. The bankruptcy 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 stop a creditor's attempt to sell your property to satisfy a judgment or 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 a tenant files bankruptcy, landlords find it relatively easy to proceed with eviction. But landlords must still abide by rules that respect the rights of the tenant. To determine when a bankruptcy case will stop an eviction, we have to look at some special rules and procedures. If you're in this situation as a landlord or a tenant, it's best to consult with a knowledgeable attorney. The windows for action are short and the rules are not easy to implement.
If you file for bankruptcy before the eviction court issues its order for possession or eviction judgment, the automatic stay goes into effect to stop the eviction (unless you've had bankruptcy cases pending in the last year).
The automatic stay has an exception: If the eviction alleges that you're endangering the property or using illegal drugs, the landlord can file a certification with the court about the evidence and proceed with the eviction. You have the right to object to the certification, but you'll have to attend a hearing and convince the bankruptcy court that the landlord is wrong.
Filing a bankruptcy won't stop an eviction if the landlord has already obtained an order of possession or an eviction judgment from the state court.
This rule has an exception, too. In a few states, you still have a right to catch up the rent (reinstate) after the eviction court issues the order for possession. But, you must act quickly. A special bankruptcy rule allows you to buy a little time before the automatic stay lifts. If you deposit with the bankruptcy court all the rent that will come due within 30 days, then within 30 days, pay the landlord all the past due rent, and the automatic stay will remain in place.