Can You File Bankruptcy with a Pending Lawsuit?

Filing for bankruptcy usually stops a pending lawsuit against you, at least temporarily, through a court order called the automatic stay. The stay pauses most civil lawsuits involving money or property and can end them for good if the underlying debt is erased, or "discharged," in your bankruptcy case. It won't stop most criminal or family court matters, though. Below, you'll find out which lawsuits bankruptcy pauses, which ones keep going, and what happens to a judgment, lien, or lawsuit you filed against someone else. Keep in mind that the automatic stay might last only one month, or not go into effect at all, if you've had multiple bankruptcy filings during the previous year. (11 U.S.C. § 362.) 

What Types of Lawsuits Does the Automatic Stay Stop?

The automatic stay is most likely to suspend lawsuits affecting your debts or your property. In many cases, as soon as someone involved in a lawsuit notifies the court of the bankruptcy filing, the judge will suspend the case. Common examples include lawsuits over:

• 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 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. Bankruptcy won’t stop most matters brought in family or criminal court, and a handful of other actions usually continue even after you file, including:

• 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 the termination of a marriage 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 involving money and property, such as 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.

Here's a quick side-by-side comparison of how the automatic stay treats common lawsuits:

Will the Codebtor Stay Protect a Cosigner Being Sued?

Yes, but only in Chapter 13. A separate protection called the codebtor stay can pause a lawsuit against the friend or relative who cosigned your consumer debt. The codebtor stay applies only to consumer debts, and only if the codebtor didn't benefit from the loan the way you did. A creditor who wants to pursue the codebtor directly must first ask the bankruptcy court to lift this stay, much like the process for lifting the automatic stay against you. (11 U.S.C. § 1301.) 

If I'm Suing Someone Else, Will Bankruptcy Affect That Lawsuit?

Yes. 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. You must list any pending or potential lawsuit on your bankruptcy schedules and Statement of Financial Affairs, even if you haven't filed the lawsuit yet, so the trustee and the court know it exists (11 U.S.C. § 521.)

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

Possibly. When a bankruptcy case halts the pending lawsuit, and the outcome of the suit could determine that a debt usually discharged in bankruptcy shouldn't be discharged, you can expect the creditor to either:

• file a motion asking the bankruptcy court to lift the stay so the case can resume, or
• refile it in the bankruptcy court.

Although the plaintiff could dismiss the lawsuit, keeping it in the original court is usually less expensive and more efficient. Many bankruptcy judges will agree to let the case finish in state court and adopt the outcome in the bankruptcy case. (11 U.S.C. § 362(d).) 

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. If the state court proceeds and finds you defrauded the creditor. the bankruptcy judge will likely apply that finding to the bankruptcy matter and declare the creditor’s debt nondischargeable.You won’t be able to discharge that debt in your bankruptcy case. (11 U.S.C. § 523(a)(2).)

Are Lawsuit Judgments Discharged in Bankruptcy?

Usually, yes. 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 (11 U.S.C. § 522(f).)

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 it.

Can a Bankruptcy Stop an Eviction?

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

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 about a pending eviction 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 where you live.

Can I File for Bankruptcy After Losing a Lawsuit?

Yes, you can, though filing earlier gives you more protection. 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 before the state court issues a judgment, you won’t need to worry about:

• 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 will also stop many government licensing actions, too.

Also, if the court dismisses your bankruptcy case without a discharge, the pending lawsuit can resume because the automatic stay no longer applies. The parties can pick the suit back up once that happens.

Seek Legal Advice

If you're facing a lawsuit and considering bankruptcy, filing sooner rather than later gives you the most protection. It triggers the automatic stay, and it locks in your position before a court can enter a judgment or lien against you. Talk to a local bankruptcy attorney before you file, especially if fraud, a family law matter, or a criminal case is involved, since those situations call for careful timing and strategy.

For next steps, review the differences between Chapter 7 and Chapter 13, check whether you qualify to erase debt in a Chapter 7 case, and find out how a Chapter 13 repayment plan can solve problems Chapter 7 can't—starting with the bankruptcy overview linked above.