Is Bankruptcy An Option When Facing a Lawsuit?

Posted by on Apr 11, 2012 in General Legal Topics | 0 comments

When you get served with a summons and complaint, that can cause anyone anxiety.   However what can you do about it?   Well, you can defend the lawsuit or try and settle the matter.  If that happens, great! – but if you lose, you have a judgment against you.   What does that mean?  Well, if you have a judgment against you, your wages can be garnished if you earn a paycheck, your bank account can be tapped without notice, and even your assets may be at risk in certain situations.

However, what happens when defending the lawsuit is simply not an option?  Well, that’s when many individuals facing such circumstances call me and start asking me if bankruptcy is a viable option.  And the answer is oftentimes yes because if the total debt that individual is facing is insurmountable or represents only the tip of the iceberg for that individual’s financial problems,  the lawsuit may be the least of that person’s long term concerns.   In such cases, bankrutpcy may be an option.

Where the person qualifies for chapter 7 bankruptcy, that individual can discharge the underlying debt serving as the basis of the lawsuit.  When a bankruptcy is filed, the automatic stay is invoked and the lawsuit must stop for the time being.   If the bankruptcy is succcessful, the debt will be dischaged and the lawsuit must be dismissed as to the debtor because the debt is no longer legally enforceable due to the success of the bankruptcy.

The same concept applies in other chapters of bankruptcy, although with chapter 13 for example, the discharge comes only after all plan payments have been made unless a hardship discharge is granted, which is rare.

Keep in mind the nature of the underlying debt is important.  For most consumers facing lawsuits for credit card debt, such debts are generally always dischargeable since the debt is typically occurred in good faith under unforseen/uncontrollable circumstances.  However, if the underlying lawsuit is based on claims for fraud, breach of fiduciary duty, or other more problematic causes of action, the claim might not be so easily discharged in bankruptcy should the creditor fight the debtor’s discharge of that particular claim under bankruptcy code section 523.   In all cases, it is important to contact a competent bankruptcy attorney so that your all options can be properly assessed.

 

 

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