If you’re struggling financially a lawsuit can be the last thing you need. However, when you need a way out to rebuild, can filing for bankruptcy put your legal troubles to rest? Keep reading to find out!
There are two common types of consumer bankruptcy: Chapter 7 and chapter 13. Chapter 7 is also known as liquidation and involves assigning a trustee to ta debtor’s case and dividing all property into two groups: exempt and nonexempt.
Exempt property is everything necessary to maintain a standard of living while the nonexempt property is what the court deems as “excess” and unnecessary for a standard of living. The property deemed nonexempt is subject to liquidation. The liquidation process involves selling property or assets and using the profits to pay creditors. Debts remaining after the liquidation of non-exempt property are discharged.
On the other hand, debtors with some disposable income but no way to pay back their debt through the normal means may qualify for Chapter 13 reorganization. Chapter 13 does not involve a trustee and does not require liquidation. Instead, the debtor needs to create a reorganization plan that will allow them to repay all of their debt with an extension of three or five years.
Bankruptcy not only results in debt relief but also puts a stop to creditor actions and collections. When a person files for bankruptcy, the court issues an automatic stay which is a court order to creditors baring them from contacting the debtor to collect.
Lawsuits in Progress
Because of automatic stays, some pending lawsuits may stop after filing for bankruptcy. However, only pending lawsuits involving civil matters can be paused by an automatic stay – no criminal or family lawsuits can be stopped by a bankruptcy court. The automatic stay prevents creditors and those trying to win a money judgment or damages from collecting. Once the court issues an automatic stay order, the court decides how the debtor’s remaining funds will be distributed.
The following lawsuits can be paused during an automatic stay:
- Credit card balances
- Home foreclosure
- Breach of contract
- Deficiency balances
- Compensation for negligence (injuries, accidents, etc.)
- Financial disputes between business partners
- Some business litigation cases
In many cases, the court handles underlying debt issues making the lawsuit irrelevant. Unless there are unique circumstances that prevent the automatic stay from stopping the case, the lawsuits listed above typically do not withstand a bankruptcy case.
Under special circumstances, a creditor may make a formal request to the court to lift an automatic stay order. If the court grants the request, the lawsuit may move forward.
The bankruptcy judge could potentially agree to lift the automatic stay if:
- The lawsuit will solve any issue that arose during the bankruptcy case. For example, if there are suspicions of fraud the lawsuit may proceed if it addresses the charge directly. In some cases, this helps to uncover evidence that will either disprove the charges or lead to further investigation.
- The final outcome of the lawsuit does not affect the bankruptcy case in any way or the result will cause the creditor to face financial harm.
The party who brought the lawsuit may request that the court continue the lawsuit. If regulatory concerns arise or the case is brought by a government agency like the IRS, the court is more likely to let the case stand.
Bankruptcy can eliminate some lawsuits via automatic stay but here are some special circumstances that could affect whether the court stops the lawsuit. Ultimately, the result of a bankruptcy case and lawsuits filed before or during bankruptcy depends on the unique circumstances of the debtor.
If you are considering bankruptcy and may be facing a lawsuit, contact the Law Office of Seni Popat, P.C. as soon as possible. Our firm can guide you to the most optimal result.