Bankruptcy is stressful enough, but having a lawsuit on top of it only adds to the anxiety. If you’re facing a bankruptcy in the near future, or you have already filed, it’s important to understand your legal rights. That means knowing how lawsuits against you may, or may not, be affected.
Toronjo & Prosser Law has extensive experience with all aspects of the U.S. Bankruptcy Code. We’ve helped individuals and families across the Dallas-Fort Worth region get the relief they need. If you have questions about how bankruptcy law may protect you from litigation, count on us.
How Bankruptcy Can Stop A Lawsuit
Debtors typically seek the help of a bankruptcy attorney after they have been sued by a creditor for an outstanding debt. Others take action before litigation against them starts. Either way, there’s a good reason to file for bankruptcy if you’ve been sued or you believe you’re about to be sued over a debt. And that’s because of something called the automatic stay.
Once you file for bankruptcy, an order called an automatic stay is imposed against any creditors who may be pursuing you. This means that not only will most civil lawsuits be frozen, most collection actions are also stopped. The same goes for your creditors’ attempts to collect on judgments against you, meaning that wage garnishment and property seizure to satisfy the judgment can be stopped.
After the stay is ordered and litigation and collection efforts cease, the bankruptcy court will have more time to determine the debtor’s available assets so they can be distributed among the creditors.
Examples Of Lawsuits And Other Actions That Are Stayed
Lawsuits, collections, and judgments concerning your debt will necessarily impact your assets. That’s primarily what bankruptcy is concerned with. So when the stay goes into effect, some of the actions that get suspended are:
- Consumer debt collections
- Money being demanded in a breach of contract action
- Foreclosures on a home
- Financial disputes between business partners
- Negligence (e.g. personal injury) court judgments
Does The Automatic Stay Prevent All Lawsuits From Going Forward?
An automatic stay is useful to keep lawsuits and related actions from proceeding against you, but there are some exceptions. The most common ones are:
- Child support and alimony lawsuits. These types of support lawsuits, including motions to modify or collect, can still move forward. If you aren’t paying your child support, for instance, you can count on the court proceeding with a hearing.
- Paternity and child custody lawsuits. A court action against you to establish paternity of a child is not going to be affected by the bankruptcy stay. The same is true for child custody cases, including those involving visitation.
- Divorce. As with other domestic litigation, divorce can still proceed even with a bankruptcy stay. However, to the extent the divorce deals with property division, the stay will suspend court action.
- Criminal proceedings. Legal action in the form of criminal court proceedings will not be affected. That includes criminal fines you are ordered to pay.
- Some tax proceedings. Certain IRS actions against you can continue, despite the stay. Those include audits, demanding a tax return, and tax assessments. But the stay does prevent the IRS from issuing a tax lien or seizing your income or property.
Although the bankruptcy can’t stop these and a handful of other lawsuits, the good news is that it can help you meet these obligations. By making your debt more manageable, you will be in a better position to handle the costs of these court actions.
Can Creditors Have The Stay Lifted?
The automatic stay is not permanent, and creditors can file an action to request the court to lift it. That means a creditor can ask the judge to grant it permission to continue collection and litigation actions against you. In order to convince the court to lift the stay, the creditor must show the following:
- Doing so won’t negatively harm other creditors in the bankruptcy proceeding
- The creditor would be financially harmed (lose money) if the stay is not lifted
Alternatively, a lawsuit may be allowed to continue proceeding against you if it can decide an issue that must be resolved during the bankruptcy. For example, if there are fraud allegations involving your debt, the outcome will determine whether the debt can be discharged. But a lawsuit may be necessary to decide if the fraud in fact happened.
Foreclosures are one type of case in which creditors commonly ask the judge to lift the stay. And there’s a good chance that the stay will be lifted in these cases, especially if the house has no equity that can be used to pay other creditors. Plus, the nature of a mortgage is that the bank (or other creditor) has a lien on the property. That lien can be exercised to force a sale to recover what you owe. Keeping the stay in place would only financially damage the creditor, without benefiting any other creditor in the bankruptcy proceeding.
Can I Oppose A Request To Lift The Stay?
The debtor, or another creditor, can oppose the request to lift a bankruptcy stay. A hearing will be held and the creditor requesting the lift will have to make its case in court. If the judge is convinced that the above criteria are met, the stay will be lifted.
If You’re Facing a Lawsuit During A Bankruptcy, We Can Help
Every lawsuit and collection action is different. If you’re in bankruptcy or you plan to file soon, it’s important to have an experienced attorney evaluate your situation. Toronjo & Prosser Law knows how tough it is to have a lawsuit in addition to a bankruptcy. Let us help. We can explain your legal options, take action to protect your rights, and work with you to move forward from your debt. Reach out to us today to get started.