Commencement of a lawsuit or impending trial often prompts defendants to consider
Since the legal theories behind lawsuits can range from the
simple collection action to a complex business tort case, there are no universal
answers about whether the filing of a suit signals time to file bankruptcy.
Here are some things to consider.
The law presumes that if you don't answer the complaint, you agree
with the contention of the lawsuit. Consider answering the lawsuit
if 1) you have a defense; or 2) you want to buy time to
consider your options.
If you do not file an answer, the plaintiff (the entity that brought
the suit) can ask the court for entry of a judgment in the amount stated
in the complaint. Perils
of waiting til the court date to act. If no amount is stated, the
plaintiff has to put on proof of the amount of damages; generally
unless you answered the complaint, you cannot participate in the hearing
to set the damages.
Once a judgment is entered, the plaintiff can obtain a lien
on your assets and can use the services of the sheriff to levy on your
bank accounts and garnish your wages (if permitted in your state).
If all of your assets and income are
exempt under the law of your state, and you expect that situation
to continue well into the future, you may be able to ignore the suit
Even after a creditor gets a judgment, you can negotiate with the creditor
for the payment of the judgment. Since the creditor incurs expenses and
delay in using legal processes to collect a judgment, you can sometimes
negotiate a discount on the judgment for voluntary payment.
First, remember that it takes weeks or even months from service of
the actual lawsuit until the creditor actually has a judgment on which
he can execute. There are time periods prescribed in the applicable
law which create the absolute minimum time periods required, and there
is the urgency, or more often, non urgency of this matter to the creditor.
In general a debt represented by a judgment is just as dischargeable
as the same debt prior to entry of judgment. Note, however:
- A judgment lien that attaches to assets is only
avoidable by the debtor if it impairs an exemption.
More about exemptions.
- If the complaint alleged fraud or other grounds that would make a debt
non dischargeable in bankruptcy, entry of a judgment against you may prevent you from later
contesting the facts (i.e. you may be unable to get a bankruptcy
court to hear your side of the fraud charge in a non dischargeability
on non dischargeable debts.
- In the case of debts that are unliquidated
(uncertain in amount), a judgment will liquidate the debt:
that may have the effect of increasing your debts beyond the eligibility
requirements of Chapter 13, with its expanded discharge and inexpensive
reorganization possibilities. More on
Chapter 13 discharge.
Bankruptcy will terminate garnishments as to wages earned
after the filing
of the bankruptcy.
Wages earned before the filing may be recoverable from the sheriff
or the creditor if those wages would otherwise have been exempt.
More on recovering exempt property
The only possible exception concerns child support
collections: in such cases it depends on what chapter bankruptcy case is
selected and whether the support first came due before the commencement of the
case, etc. More on the automatic stay.
Is bankruptcy the solution?
The decision to file bankruptcy should not, in general, be driven by
a single debt, but should be made after considering the total financial
picture, the scope of relief that bankruptcy offers, and the non bankruptcy
What do I have to do to file bankruptcy
Dangers of debt settlement schemes