Many people choose to file for bankruptcy after being served with a lawsuit 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 legal cases.

How Does Bankruptcy Stop a Lawsuit?

When a debtor (the person owing debt) files a case, an order called the automatic stay prevents creditors from continuing any collection activity, including attempting to win a money judgment in a lawsuit. The stay ensures that one creditor doesn’t get a disproportionate 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 the creditors.

Which Lawsuits Will Continue After a Bankruptcy Filing?

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, and
• child custody and support cases.

Most other lawsuits will be stopped by the automatic stay.

What Types of 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 accidentally harmed someone in some way.

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, or
• the collection of a deficiency balance (the amount still owing after a property auction).

In almost all of these situations, the underlying debt will get handled in the bankruptcy 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 so that the lawsuit can 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 without 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.

(For more details, see Lawsuits You Can't Stop By Filing for Bankruptcy.)

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