Can You File Bankruptcy with a Pending Lawsuit?

You can file for bankruptcy after someone sues you in a lawsuit that's pending in another court. The bankruptcy case will likely suspend the trial temporarily and end it altogether if it concerns money or property and the claim is erased or "discharged" in the bankruptcy case.

However, bankruptcy won't stop most matters brought in the family or criminal court. In this article, you'll find out how another court case will be affected when you file for bankruptcy.

Will a Lawsuit Affect My Bankruptcy?

Not necessarily. The impact of bankruptcy on an existing lawsuit will depend on the type of case and whether someone is suing you or you have an action against them.

If someone is suing you, filing for bankruptcy will likely stop the lawsuit if it involves a money collection action. Other types of actions, such as criminal, family law, and fraud-related cases, will likely continue. We explain why below.

However, if you're suing someone or could recover money from someone, the lawsuit might be an asset you'd have to account for, and possibly lose, in your bankruptcy case. For instance, if you couldn't protect it with a bankruptcy exemption, the Chapter 7 trustee could take over your rights and pursue the action on your behalf.

What Is the Automatic Stay in Bankruptcy?

The automatic stay stops creditors from pursuing you in a lawsuit or another collection matter. Here's how it works.

When you file a bankruptcy case, the court has jurisdiction over issues concerning your debts and assets. An "injunction" or automatic stay order goes into effect immediately when the debtor files the case. The automatic stay stops creditors from continuing almost all collection activity, including lawsuits.

Keep in mind that the automatic stay might last only one month, or not go into effect at all if you've already filed for bankruptcy during the previous year. Learn about multiple bankruptcy filings.

When Will the Automatic Stay Stop the Lawsuit?

In many cases, as soon as someone involved in a lawsuit notifies the court of the bankruptcy filing, the judge will suspend the case. Lawsuits affecting your debts or your property are the most likely to be suspended, such as:

• credit cards
• breach of contract
• personal injury
• deceptive trade practices
• repossession-related collection actions
• "judicial" foreclosures brought in court, and
• some probate matters.

You'll want to consult with a knowledgeable bankruptcy attorney to be sure that you understand how bankruptcy will affect your pending lawsuit.

What Types of Lawsuits Aren't Subject to the Automatic Stay?

The automatic stay doesn't stop every legal action. Some examples of court actions that usually continue even after filing a bankruptcy case include:

• Code enforcement and nuisance actions. Lawsuits to enforce city codes, like cutting an overgrown lawn, or to stop activity, like raising livestock in the city, are part of the government's police powers that protect the health and safety of its citizens,
• Evictions. Special rules apply if your landlord is evicting you when you file for bankruptcy. If the court handling the eviction has granted the landlord a "writ of possession" or another type of eviction order, the bankruptcy won't protect you unless your state has laws that allow you to catch up on your payments. If the court hasn't issued a writ of possession, the automatic stay will stop the eviction unless the landlord certifies that illegal drug use is involved or endangers the property.
• Divorce, child custody, and child support. A divorce involves marriage termination and often a property division. Bankruptcy courts won't hear domestic matters but usually, retain jurisdiction over property.
• Criminal cases. Bringing a criminal matter is part of the government's police powers, and there is no question that a murder or burglary trial can move forward despite the automatic stay. The issues become a little more problematic when the government brings a case that involves money and property, like fines and bad checks. In general, if the lawsuit's purpose is to reimburse the government for a monetary loss, like your failure to pay highway tolls, the case is subject to the automatic stay and must be suspended. If you allegedly broke the law, like writing a bad check, the case can go forward, even if the court orders you to make good on the check as a part of the sentence.
• A lawsuit you filed against someone else. The automatic stay stops collection activity against a debtor in bankruptcy and doesn't prevent you from collecting against someone else. However, a different issue exists. Your lawsuit might be an asset in your bankruptcy case, and if it is, the trustee will take over the matter.

Will the Creditor Will Ask the Court to Let the Trial Continue?

When the bankruptcy stops the pending lawsuit, either party to the suit can file a motion asking the bankruptcy court to lift the stay so the case can resume. For instance, if the lawsuit alleges that you defrauded a creditor to qualify for a bank loan, a finding that you lied on your loan application would be relevant to whether the debt is dischargeable.

Although the plaintiff could dismiss the lawsuit and refile it in the bankruptcy court, keeping it in the original court is usually less expensive and more efficient. Many bankruptcy judges will agree to allow the case to finish in state court and adopt the outcome in the bankruptcy case.

For instance, suppose the state court finds you defrauded a creditor. The bankruptcy judge will likely apply the state court decision to the bankruptcy matter and declare the creditor's debt nondischargeable. You won't be able to discharge the debt in your bankruptcy case.

When the Court Dismisses the Bankruptcy Case Without a Discharge

Sometimes a bankruptcy case doesn't make it all the way to "discharge," the order that wipes out debt. When the case gets dismissed rather than discharged, the pending lawsuit can resume because the automatic stay no longer applies. For this reason, the state court might suspend the matter. The parties can continue the suit if the bankruptcy court dismisses the bankruptcy without a discharge.

Can I File for Bankruptcy After Losing a Lawsuit?

Yes, you can. However, whenever possible, you'll want to file for bankruptcy before the lawsuit ends. Doing so can prevent two issues you might—or might not—be able to resolve in bankruptcy. If you file for bankruptcy before the state court issues a judgment, you won't need to worry about the following:

• the creditor using the money judgment to put a lien on property that you might not be able to remove in bankruptcy, and
• the bankruptcy judge declaring the debt nondischargeable after a state court finding of fraud.

That's not to say you can't file for bankruptcy after the court issues a judgment. Not only can you do so, but you'll find relief from collection attempts, at least temporarily. And filing for bankruptcy will also stop many government licensing actions, too. A local bankruptcy attorney can explain the benefits of a bankruptcy filing.

Are Lawsuit Judgments Discharged in Bankruptcy?

The judgment for the debt itself will likely be discharged in bankruptcy if the debt qualifies for a discharge. However, if the creditor uses the money judgment to place a judgment lien on your property, the lien will remain unless you file a motion and the bankruptcy court agrees to remove it.

The creditor can use the lien to seize the property to satisfy the debt even after bankruptcy. If you find out a lien exists after your bankruptcy case ends, most courts will let you reopen the case to address the lien.

Learn more about judgment liens in bankruptcy.

Can a Bankruptcy Stop an Eviction?

If you file for bankruptcy before the landlord gets an eviction order, you can stop the eviction temporarily. But most bankruptcy courts will allow the landlord to proceed with the eviction if the landlord files a motion asking the bankruptcy court to lift the automatic stay.

Also, the automatic stay won't apply if the landlord files a certification claiming you endangered the property or were using illegal drugs. Check with a bankruptcy attorney to determine whether you have grounds to object to the certification.

Finally, a few states allow bankruptcy filers to stay in the home if they can pay the landlord the back rent within 30 days. A local bankruptcy lawyer can tell you whether this option is available.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

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.