Can I File for Bankruptcy If I Have a Lawsuit Pending?

You can file a bankruptcy with a lawsuit pending, but the lawsuit will probably be put on hold.

You can file for bankruptcy when you have a lawsuit pending in another court. The bankruptcy case will likely suspend the trial temporarily or end it altogether if it concerns money or property. By contrast, the bankruptcy won’t stop most cases brought in the family or criminal court. In this article, you’ll find out how bankruptcy will affect another court case.

(For background on bankruptcy, start by reading How Bankruptcy Works.)

When the Automatic Stay Will Suspend the Lawsuit

When you file a bankruptcy case, the bankruptcy court has jurisdiction over issues that concern your debts and your assets. An injunction (order) called the automatic stay goes into effect immediately when the debtor files the case and is designed to stop creditors from continuing any collection activity, including lawsuits.

In many cases, as soon as one of the people involved in the lawsuit notifies the court of the bankruptcy filing, the judge responsible for the matter will suspend the case. Lawsuits that will most likely be suspended are those that might affect your debts or your property. These may include cases involving:

  • credit cards
  • breach of contract
  • personal injury
  • deceptive trade practices
  • repossession-related collection actions
  • foreclosures that must be brought in court (judicial foreclosure), and
  • some probate matters.

You’ll want to consult with a knowledgeable bankruptcy attorney to be sure that you understand the way a bankruptcy filing will affect your pending lawsuit.

Some Lawsuits Aren’t Subject to the Automatic Stay

The automatic stay isn’t intended to stop every legal action. Here are some examples of court actions that can usually continue even after the filing of a bankruptcy case, although there are some exceptions.

  • 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. If you’re being evicted when you file your bankruptcy case, special rules apply. If the court handling the eviction has granted the landlord a writ of possession (a type of eviction order), the bankruptcy won’t protect you unless your state has laws that allow you to catch up 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 the property is endangered.
  • Divorce, child custody, and child support. A divorce involves the termination of the marriage and often a division of property. Bankruptcy courts will not hear domestic matters, but they will often retain jurisdiction to approve a property settlement.
  • Criminal cases. Bringing a criminal matter is part of the government’s police powers. 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 purpose of the lawsuit 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 the case is brought because you broke the law, like writing a bad check, the case isn’t subject to the automatic stay and 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 is intended to stop collection activity against a debtor in bankruptcy. Technically, it does not apply when you, as the debtor, file a lawsuit against someone else. Even so, most defendants will ask the bankruptcy court to lift the stay so that their actions will not be construed as violating the stay. For instance, the defendant in a personal injury suit might counter sue claiming you were at fault in an accident.

Asking the Court to Lift the Automatic Stay

When the bankruptcy stays the pending lawsuit, either party to the suit can file a motion asking the bankruptcy court to lift the stay so that the lawsuit 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 lender could dismiss the lawsuit and refile it in the bankruptcy court, keeping it in the original court is usually less expensive and more efficient.

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 lawsuit that was pending can resume because the automatic stay no longer applies. For this reason, many courts will suspend the case rather than end it on the chance that the bankruptcy is dismissed and the parties choose to continue with the suit.

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