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.
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.
Bankruptcy doesn’t help people avoid all legal actions. Here are a few matters that will continue despite a bankruptcy case:
Most other lawsuits will be stopped by the automatic stay.
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:
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.
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.
(For more details, see Lawsuits You Can't Stop By Filing for Bankruptcy.)