Being sued is likely on everyone’s list of things they hope never happens to them. Opening an envelope and seeing a document that informs you someone has sued you can be an incredibly anxiety-producing moment – even more so if your financial situation was dire before the lawsuit arrived. So what do you do now? You know you have no way of ever paying the suit in front of you, so what are your options?
People in desperate financial circumstances often consider filing bankruptcy. But what if you already have a lawsuit that is now pending? Will filing bankruptcy now help or hurt your interests?
Filing Bankruptcy May Stop a Pending Lawsuit
Filing for bankruptcy can be very helpful to financially strapped debtors. If you are being sued civilly for money damages that you have no way of paying, filing for bankruptcy may help. This is because the act of filing brings an automatic halt to many types of pending lawsuits.
Automatic Stay
One of the main ways that filing for bankruptcy can help is referred to as an automatic stay. This means that, once you file bankruptcy, most pending lawsuits are stopped in their tracks. This is because most lawsuits are about money.
Criminal Cases
The big exception to this rule is criminal charges. There are two basic divisions of court cases: civil and criminal. Criminal cases have to do with breaking laws found in the criminal code. Civil cases have more to do with monetary compensation to victims of negligence and general wrongdoing.
Criminal charges have very little to do with money. Yes, there can be court fines, penalties, and even restitution (an order that makes the defendant pay money losses back to the victim) in some criminal cases. However, that is not the main focus of criminal cases. The focus of a criminal matter is generally to punish a violation of criminal law, typically through incarceration, fines, or loss of a right or privilege – such as losing your driver’s license.
A simple way to think about it is that criminal cases have to do with loss of rights and/or liberty, and civil cases have much more to do with money. So if you are unsure whether your pending case is criminal or civil, just ask yourself what the consequences are should you be found guilty. If incarceration is even a possibility, however remote, then you are likely looking at a criminal charge. Criminal charges are rarely stayed during a bankruptcy because one has nothing to do with the other. Your lawyer can distinguish between the two, and help you determine if the judge will stay your case during the pendency of your bankruptcy.
Civil Cases
Civil cases have much more to do with money and are more likely to be stopped during a pending bankruptcy. The reason for this makes sense if you think about it. The bankruptcy court has jurisdiction to decide matters that pertain to your assets and debts. So if a pending lawsuit alleges that you owe someone money, the chances are that the case can be stopped from proceeding until the bankruptcy is resolved. Examples of cases that are typically stayed during a bankruptcy are:
- Negligence actions where compensation is demanded because you allegedly caused someone harm due to a car (or other vehicular) accident, a slip and fall on your property, medical malpractice if you are a health professional, etc.
- Debt collection lawsuits
- Business related financial disputes between owners
- Breach of contract actions
- Foreclosure on your home
These are the types of claims that can either be dismissed or otherwise handled by the bankruptcy court. However, there are situations where the plaintiff in the case against you can ask the bankruptcy court to allow their lawsuit to continue. The judge may grant the request or not, depending on individual circumstances. Your lawyer can look at the details and advise you of the chances that a current civil case will go forward or be automatically stayed during your pending bankruptcy.
Civil Cases That May Not Be Stayed
We have discussed the difference between criminal and civil lawsuits, and we’ve established that criminal cases are typically not affected by filing bankruptcy because they have more to do with your freedom than money. Civil lawsuits typically have to do with money and are often subject to the automatic stay of a bankruptcy filing. However, it is important to note that some civil cases can still go forward.
Types of Civil Cases That Proceed Despite Bankruptcy
Divorce and Child Support
Child support matters won’t be affected by a pending bankruptcy. Yes, child support arrearages can mount into the thousands and even the tens of thousands, but it is still not a debt that can be discharged or otherwise affected by declaration of bankruptcy.
Likewise, divorce proceedings can go forward. Family court is civil in nature, however, the determinations as to alimony, child support, child custody, and even the division of assets can go forward. But the division of assets does muddy things up a bit. If assets are to be divided and/or sold off, the proceeds from the division may be used by the bankruptcy court to distribute to creditors in an attempt to satisfy as many debts as possible prior to discharge. This is a complex area of law where the advice of an experienced attorney is particularly useful.
Requests to Lift the Stay
While any creditor can request that the automatic stay be lifted for them, they must have a good reason and submit a formal request to the court. Cases where the stay is usually lifted often involve circumstances listed below.
- Creditors on car loans may give the debtor the option to sign a new contract and continue to pay for the vehicle. But if the debtor chooses not to do this, then the creditor can usually get the stay lifted, repossess the car, and minimize their financial loss.
- Mortgage lenders are similarly situated. They stand to lose more money the longer a bankruptcy drags out, so they are often granted a lift of the stay and ability to foreclose on the debtor’s house.
- If there is an open case where you have been accused of fraud by any creditor, the bankruptcy court will usually refrain from getting involved with such a case. The judge will likely let the fraud case continue and resolve on its own.
- Any other time a creditor can present the bankruptcy court with a compelling reason to lift the stay. The judge listens to the arguments and decides, based on the facts, whether or not the stay should be lifted.