What happens to pending lawsuits/judgments when bankruptcy is filed
What happens when there is a lawsuit against you when you file bankruptcy? For most typical credit card, repossession, miscellaneous debt collection lawsuits, they are simply dismissed when the case is filed. Even if a judgment is obtained, the bankruptcy can usually eliminate these debts, though there is a risk that the creditor with a judgment (judgment creditor) could garnish wages, or levy on property between the date of the judgment and the date the case is filed. Such garnishments used to go away automatically, but a recent Supreme Court case may require the debtor attorney to affirmatively get the garnishment released, such as providing bankruptcy information to the employer to release the garnishment. Levies may be harder to do. For example a levy on a bank account or vehicle may require a chapter 13 filing and payment of the secured claim through the bankruptcy to get the levy released, though depending on the circumstances either the pre-filing garnishment or the levy may be challenged as a preferential transfer under 11 U.S.C. 547.
One other issue to be wary of in judgments, is the relatively rare case where the judgment includes language that may make the debt one that cannot be eliminated in bankruptcy. For example, if the judgment declares that there was fraud, conversion of assets, or some manner of defalcation (mismanagement) in a fiduciary capacity (where you were holding assets in trust for someone else) this could prevent the debt from being eliminated in bankruptcy. While such judgments are rare, any attorney will want to review judgments prior to filing to ensure this is not a problem.
Other judgments, such as for alimony or child support, or possibly even property settlements in divorce (if a chapter 7 case is filed) may not be eliminated in bankruptcy. The judgment will set the amount owed, and the bankruptcy court is not able to change such results. The bankruptcy court can re-examine a divorce order to see if a certain debt is actually in the nature of alimony/child support or a property settlement. This is important in that chapter 13 cases can usually eliminate property settlement debts, but not alimony or child support debts. The bankruptcy court is not a route to appeal the findings made in judgments though, as such appeals would have to go through the normal state court process.
If a divorce suit is pending when a case is filed, the bankruptcy may temporarily stop the suit, but the bankruptcy court is very likely to enter an order allowing the suit to continue after the bankruptcy is filed, at least to determine the amount of alimony or child support, or property settlement. The court may want the parties to come back to the bankruptcy court before allowing enforcement of property settlement orders, or back alimony, child support orders if a chapter 13 is filed, as chapter 13 may be able to deal with such debts through the bankruptcy. Chapter 13 cannot stop enforcement of ongoing alimony or child support obligations, but amounts past due when the case is filed may be able to be caught up over time in a chapter 13 case.
If there is litigation alleging a type of fraud or defalcation in a fiduciary capacity, or some other litigation that will affect whether the bankruptcy can be approved or what debts can be discharged, the bankruptcy will usually stop such lawsuits when the case is filed, but will then have to decide (on motion of one of the parties to the suit) whether to decide the issue itself or send the matter back to the state court to determine the result. Factors the court looks at in making this decision is how far the matter got in state court before filing, whether the matter involves bankruptcy issues or just state law claims, where the parties are located (especially if the bankruptcy is in a different state than the state court suit), and whether it appears one party is forum shopping – ie seeking a different court it believes will be more favorable to it, and how long it will take to conclude the matter in state court vs bankruptcy court. Often matters can proceed quicker in bankruptcy court. Again, the bankruptcy will often enter an order allowing litigation to conclude in state court up to the point of any enforcement of the judgment, then require the parties to return to the bankruptcy court.
All of these issues warrant hiring experienced counsel who can look for potential pitfalls and anticipate what may happen when the bankruptcy is filed.
Michael Barnett has been board certified in consumer bankruptcy law by the American Board of Certification since 1993, and is AV rated by Martindale Hubbell*. AV Preeminent®: The highest peer rating standard. This is given to attorneys who are ranked at the highest level of professional excellence for their legal expertise, communication skills, and ethical standards by their peers.
- AV® , AV Preeminent® , Martindale-Hubbell DistinguishedSM and Martindale-Hubbell NotableSM are Certification Marks used under license in accordance with the Martindale-Hubbell® certification procedures, standards and policies.