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What Happens to a Creditor's Lawsuit Against Me If I File Bankruptcy?

Creditor Lawsuit

WHAT HAPPENS IF I GET SUED BY A CREDITOR?

In California, and in every other state, you have a certain limited amount of time to respond to a lawsuit by a creditor. It's generally 30 days from the day you received the lawsuit papers, usually comprised of a summons and complaint. The summons will specify the length of time, but you need to keep track of the date you receive them because that is virtually never indicated on the papers.

If you do not formally respond to the lawsuit within the designated time, the creditor wins by default. It generally receives a judgment in the amount of the debt, plus usually attorney fees, and its costs, and those amounts are usually in whatever amounts it asks for.

For reasons addressed below, it is very important to deal affirmatively with the lawsuit one way or the other BEFORE time runs out and the creditor gets a judgment. To learn how to respond to a California lawsuit you can find out more information here on how to respond to credit card lawsuit.

WHAT HAPPENS IF I FILE A BANKRUPTCY QUICKLY, BEFORE THE CREDITOR GETS A JUDGMENT?

Regardless whether you file a Chapter 7 "straight bankruptcy" case or a Chapter 13 "adjustment of debts" one, doing so will stop the judgment from being entered. The mere filing of the case operates to stop "the commencement or continuation . . . of a judicial . . . action or proceeding against the debtor. . . ." See Section 362(a)(1) of the U. S. Bankruptcy Code. You may hear about this referred to as the "automatic stay." It is a tough federal law that creditors virtually all respect and abide by.

HOW DOES THIS WORK IN PRACTICE—HOW DOES THE CREDITOR KNOW I'VE FILED?

Because there is some lag time—about a week—between the filing of your bankruptcy case and when the creditor and its attorney would be formally informed through a mailing by the bankruptcy court, your attorney will inform the creditor's attorney directly, immediately after the filing. Your attorney will retain proof that the other attorney was informed before the default judgment could be entered.

It is very important to list on your creditor schedules both the creditor plaintiff and its attorney, so they both get formal notice of your bankruptcy case from the court.

WHAT'S THE URGENCY OF PREVENTING COURT ENTRY OF THE JUDGMENT IF I KNOW THAT I OWE THE DEBT?

It is important for many reasons to get legal advice quickly about what to do about the lawsuit, regardless if you believe you owe the money. Because:

  • A judgment gives the creditor some serious tools to use against you for collecting the debt. This includes not just the usual garnishing of your wages and checking/savings accounts. You can be ordered to appear at court to testify under oath about everything you own. Your assets could be seized by the sheriff to pay the debt. The judgment can become a lien on any real estate you own, not just locally but anywhere, and not just real estate solely in your name but those shared with others (such as with your siblings through an inheritance).
  • You may have defenses you aren't aware of. For example, the statute of limitations may have expired, the suing collection company may not have a right to collect on that debt, or the creditor may have sued in the wrong court. Creditors are often not very careful, and constantly file lawsuits—and get judgments—that are not legally or procedurally appropriate. But once a judgment is entered, it is very difficult and expensive to undo, if it can be at all.
  • The allegations in a lawsuit, which are then effectively incorporated into a judgment, may make that debt more difficult, or even impossible, to discharge (legally write off) in bankruptcy.
  • The lien that the judgment creates on your home may be impossible to get out of, with the result that you would have to pay a debt that you may not otherwise have had to pay. That judgment lien can often give the judgment creditor the right to foreclose on your home. Even in the best of circumstances, taking that lien off your home will cost you money.

WHAT IF I WAS SUED A COUPLE MONTHS AGO AND THE CREDITOR ALREADY GOT A JUDGMENT?

The "automatic stay" referred to above also stops "the enforcement . . . of a judgment obtained before the commencement of the case . . . ." See Section 362(a)(2). That includes stopping garnishments—either a pending or a new one—and any other means of collecting the judgment.

If the judgment attached as a lien to your home, under many circumstances that judgment lien can be "avoided"—unattached from your home, though bankruptcy. Whether that is possible depends on the value of the home and the amount of equity in it compared to the homestead exemption that applies to your home. If such a judgment lien "avoidance" can be done, this is available under either Chapter 7 or 13.

AFTER THE LAWSUIT IS STOPPED, WHAT ACTUALLY HAPPENS TO THAT LAWSUIT?

If the bankruptcy was filed before a judgment was entered, the lawsuit will get dismissed, either affirmatively by the creditor's attorney, or by that court for lack of activity in the case after a certain amount of time.

If a judgment was entered, the judgment will generally be and remain on your credit record, even though the creditor will have no right to exercise any of the normal rights of a judgment (other than possible lien rights).

This all assumes that you do in fact discharge the underlying debt through your bankruptcy case. If you fail to do so, as soon as your bankruptcy case is over the "automatic stay" will expire. The creditor would be able to get a judgment against you, if it had not before your bankruptcy was file, and if it had, it would be able to collect on that judgment. It's clear that if you file a bankruptcy case to deal with a lawsuit, it's crucial that you follow through and complete it successfully.

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