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Bankruptcy in Brief

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Lawsuits

Commencement of a lawsuit or impending trial often prompts defendants to consider bankruptcy.

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.

Should I answer the complaint?   

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.

Californians can find information about representing themselves in state law matters (not bankruptcy) from the court's legal self help site

What happens if I do nothing?  

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 altogether.

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.

Do I have to file bankruptcy before my creditor gets a judgment?  

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 exemptionMore 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 action).  More 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.

Will bankruptcy stop garnishment on a judgment against me?  

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 from creditors.

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 alternatives.

Considering bankruptcy

Bankruptcy basics

What do I have to do to file bankruptcy

Dangers of debt settlement schemes

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  4/27/08