Filing for bankruptcy will stop some civil lawsuits immediately, which can be great if you’re facing uncomfortable discovery, like testifying at a deposition. But filing earlier rather than later has even more important benefits that will help protect your property. The simple reality is that timing your bankruptcy is important because taking care of a debt in bankruptcy is much easier if you file before losing a lawsuit.
Even if you already have a money judgment against you, filing for bankruptcy can help. Find out what bankruptcy can do if you’re involved in a civil lawsuit or already lost and the state court awarded your creditor a money judgment.
Understanding How Creditor Lawsuits Work
If you don’t pay your credit card bill or some other debt, you can expect your creditor to take you to court, especially if you owe a significant amount. Most creditors, but not all, must file a lawsuit and get a judgment before forcing you to pay what you owe.
Once a creditor has a money judgment, the creditor can use it to empty your bank account or deduct money from your paycheck. Worse yet, a judgment creditor can put a lien on your property.
What Types of Civil Lawsuits Will Bankruptcy Stop?
Bankruptcy will stop almost all civil debt collection litigation matters, at least temporarily. An automatic stay order stops creditors from pursuing you during your bankruptcy case as soon as you file.
However, the stay won’t last long if you filed for bankruptcy the previous year and might not attach if you already filed twice before. Bankruptcy doesn’t stop family court cases involving domestic support obligations and criminal actions. Learn about filing multiple bankruptcy cases.
Civil Judgments You Can’t Get Rid of in Bankruptcy
The bankruptcy court won't "discharge" or wipe out the debt if the state or bankruptcy court finds the following:
- embezzlement or fraud
- death or injury of another as a result of driving while intoxicated, or
- willfully or maliciously injuring a person or damaging property (you did it on purpose, not accidentally).
Any other judgment debt will go away in bankruptcy if it isn't for a nondischargeable debt.
Will the Bankruptcy Court Ever Let a Civil Lawsuit Continue in State Court?
Yes, it can happen if a creditor successfully files a motion with the bankruptcy court asking for permission to continue suing in another court. Most bankruptcy judges will agree to do so if:
- The litigation outcome won’t affect bankruptcy creditors. An example would be when a government agency seeks penalties the filer can’t discharge in bankruptcy.
- The state litigation has already progressed significantly, and bankruptcy creditors need to know the case's outcome.
The types of litigation that would give rise to the second scenario include fraud cases, complex business cases, and civil actions alleging that the filer purposefully injured someone or damaged property. Because litigation is expensive, the bankruptcy court often allows the case to go to judgment in state court rather than forcing the litigants to start from the beginning in bankruptcy court. The bankruptcy court then recognizes the outcome.
Can Civil Lawsuits Be Filed (or Refiled) in Bankruptcy Court?
Absolutely. If you're involved in a state lawsuit and you file for bankruptcy to stop it, the creditor can refile the action in bankruptcy court in what is known as an "adversary" proceeding. Or a creditor might file an action for the first time after learning about the bankruptcy case.
In either case, if the bankruptcy court determines the debt is nondischargeable, you’ll have to pay it after the bankruptcy case.
When Will a Creditor File an Adversary Proceeding in Bankruptcy Court?
The creditor won’t bother to sue you if the debt won’t survive bankruptcy. For instance, if the debt is for a credit card balance and the creditor isn’t aware of any fraud, you’ll be able to discharge it in Chapter 7 or Chapter 13.
Also, pursuing litigation is expensive, and if you’re bankrupt, there’s probably no money to be had. Because a rational creditor won’t throw good money after bad, even a creditor with a solid case against you likely won’t file an adversary proceeding.
However, each case and each creditor is unique. For instance, if you file a Chapter 13 case, and the creditor thinks fraud occurred, it’s less likely that the plaintiff will let the action go because you’ll have to pay into a repayment plan for three to five years, and the creditor might stand to gain something.
Can Bankruptcy Make a Civil Lawsuit More Problematic?
Litigation is expensive, and most creditors won't sue unless it makes financial sense. If they’d stand to lose more than they’d gain, they take the loss and walk away.
However, angry people pursue litigation out of a need for vengeance rather than a monetary incentive. The federal bankruptcy court isn’t always the best place to resolve such disagreements, so if you might be up against a particularly adversarial opponent, you might consider other options.
Here are a few situations that might give you and your lawyer strategic pause:
- When facing an adversarial opponent. Suppose you’re dealing with an emotionally invested individual, such as a spurned ex-spouse or business partner, and assets are involved. The bankruptcy trustee’s job is to find assets for creditors and trustees routinely welcome help from angry creditors. So you can expect a long, costly, and detailed look into your finances.
- When facing a large organization. Sometimes companies like utility providers want to take a stand against fraud by pursuing a case even when they don’t expect to recover money. And a win would allow the company to continue collecting the amount owed for a significant period because the bankruptcy court wouldn’t discharge the debt.
- When you’ve done something questionable. Bankruptcy judges don’t shrink from punishing inappropriate conduct. If one of the above situations exists or you’ve done something else wrong and your case isn’t sympathetic, a bankruptcy court might not be the best place to resolve the issue. The penalties assessed could easily double the amount you owe.
Talk with a bankruptcy attorney to learn whether your case would hold up before your local bankruptcy judges.
What Happens If You Already Have a Civil Court Judgment?
If your creditor already has a money judgment against you, bankruptcy might help, but it will depend on three things:
- Can you discharge the debt in bankruptcy?
- Has the creditor used the money judgment to put a lien on your property?
- Can you protect the "encumbered" property (the asset with the lien on it) with a “bankruptcy exemption”?
Here’s how you’ll find the answers to these questions.
1. Can You Wipe Out the Debt in Bankruptcy?
Check whether the debt is a “nondischargeable debt.” If the obligation isn’t a debt you can discharge, bankruptcy won’t help. If you can wipe out the debt in bankruptcy, go to step two.
2. Has the Creditor Recorded the Money Judgment and Put a Lien on Your Property?
If the creditor hasn’t put a lien on your property, file bankruptcy fast before the creditor does so. Bankruptcy will help.
If you don’t know whether your creditor has a lien, keep reading to learn how to find out. If you don’t know what a lien is, read the “How Liens Work” section below.
In some states, a money judgment automatically creates a property lien. Read your money judgment because it might tell you, and check your state's law (your local court's self-help department can help). Next, check your area's county recorder or equivalent to determine whether the creditor recorded a lien against your real property. Check the Secretary of State or equivalent for liens against your personal property.
If the creditor has a lien, go to step three.
3. Can You Wipe Out the Lien in Bankruptcy?
Whether you can wipe out a lien in bankruptcy will depend on whether it's a judgment lien (other liens can't be erased in bankruptcy) and whether you can protect your property with a “bankruptcy exemption.” Review your state’s bankruptcy exemptions to find out.
If a bankruptcy exemption fully or partially covers the property, you can ask the bankruptcy court to fully or partially remove the lien by filing a motion. The court will remove the lien up to the exemption amount.
For instance, suppose a creditor with a money judgment puts a lien on your pop-up trailer worth $5,000. If your state has a wildcard exemption that allows you to protect any property you choose and covers $5,000 or more of property equity, you can ask the court to remove the lien. If successful, the creditor won’t be able to use the lien to take your trailer after bankruptcy.
How Filing for Bankruptcy Before Getting a Judgment Can Protect You Against Liens
Filing for bankruptcy when you're sued is almost always the right choice. If a creditor doesn’t have a money judgment when you file for bankruptcy, the creditor can’t get a lien, and you won’t have to ask the bankruptcy court to remove it.
More importantly, you want to prevent a creditor from getting a money judgment for fraud because once in hand, the creditor can easily ask the bankruptcy court to declare the debt nondischargeable.
Example. Shyanne immediately filed for Chapter 7 bankruptcy after a creditor filed a lawsuit seeking $10,000 for an outstanding credit card account. The complaint alleged fraud due to inflating income when applying for the account. The automatic stay stopped the litigation in its tracks. Shyanne erased the $10,000 debt before the creditor could get a judgment and file a lien against her property, and the creditor didn't pursue a fraud judgment in bankruptcy court.
Example. Jorge’s medical provider filed a lawsuit against him to recover $50,000 in medical bills. After winning and receiving a money judgment, the medical provider filed the judgment with the county recorder’s office and a $50,000 lien attached to Jorge’s home. Jorge filed for Chapter 7 bankruptcy and wiped out the medical bills. Because Jorge’s state offered a $75,000 homestead exemption protecting $75,000 in home equity from creditors, Jorge successfully asked the bankruptcy court to remove the medical lien from his home. The motion wouldn't have been necessary if Jorge had filed his case before receiving the judgment.
Example. Assume the same facts, but the homestead exemption was $5,000, and Jorge had $60,000 in home equity. In that case, the lien would remain in place because it wouldn’t interfere with Jorge’s right to $5,000 in home equity.
Also, filing for bankruptcy before your creditor gets a money judgment will prevent your creditor from removing money from your bank account with a “bank levy,” taking wages with a "wage garnishment," and seizing property. The creditor with a money judgment can do all those things without recording a lien.
Meet With a Bankruptcy Lawyer
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.