There are advantages to filing bankruptcy before your deadline to respond to a creditor’s lawsuit.
In my last blog post I showed how it can hurt you both short-term and long-term to do nothing if you get sued by a creditor. Today let me tell you what happens to that pending lawsuit if you respond to it and the rest of your financial situation by filing bankruptcy.
The Beneficial “Automatic Stay”
The filing of your bankruptcy case stops that lawsuit in its tracks. It doesn’t take a separate court order or any action by the bankruptcy court or judge to stop it, so there’s no delay while something like that has to happen. Instead the mere act of filing the bankruptcy case stops the lawsuit. In the words of the Bankruptcy Code, “a [bankruptcy] petition… operates as a stay… of… the… continuation… of a judicial… action or proceeding against the debtor… commenced before the” filing of the bankruptcy case. (See Section 362(a)(1).) (“Stay” is a legal term meaning “stop.”)
Preventing a Judgment against You
Timing can be critical with a lawsuit. A judgment against you will be entered by the court if you don’t “respond” to the lawsuit by the stated deadline, and do so in the way required. If a judgment is entered against you it would give the creditor more ways to force money out of you. A judgment can also create a lien against your real estate, which a subsequent bankruptcy may or may not be able to clear off its title.
So preventing the judgment from being entered is often very important. The safe way to do so—if you determine that you need a bankruptcy solution—is to file your bankruptcy case well before your deadline to respond to the lawsuit. But if you are cutting it close, it helps that the automatic stay is effective immediately. If the creditor’s attorney is about to file court documents for a judgment to be entered but your bankruptcy is filed before that occurs, the attorney is not permitted to try to get a judgment quickly before the bankruptcy court acts. That’s because the bankruptcy court doesn’t need to act since the automatic stay is effective the moment your bankruptcy is filed.
Informing the Suing Creditor
All your creditors are mailed a formal notice of your bankruptcy filing, and some may receive that notice electronically. It can take a few days after the filing of your bankruptcy case for creditors to receive that notice. All of your creditors should know about your filing within about a week. Since that may not be fast enough to stop the judgment documents from being filed by the creditor, in urgent situations either you or your attorney must directly inform the creditor or its attorney about the bankruptcy filing.
Creditors Getting a Judgment in Spite of Your Bankruptcy Filing
If the creditor is informed about your bankruptcy filing and still goes ahead and submits the judgment papers, or somehow does not get informed in time to stop submitting judgment papers, that judgment will be invalid. The creditor or its attorney would be obligated to quickly request the court where the judgment was entered to withdraw the judgment.
If the entry of that invalid judgment resulted in any damage to you (such as a garnishment of your bank account), the creditor would not only have to quickly give you back any money taken but there’s a good chance that it would have to compensate you for the damage it caused. This compensation can include your attorney’s fees for dealing with this violation of the automatic stay. In circumstances where the bankruptcy court believes that the violation was intentional and the creditor needs to be taught a lesson, the creditor may be ordered pay you punitive damages. (See Section 362(k) of the Bankruptcy Code.) Because of these potential penalties, most creditors quickly cooperate by stopping their lawsuits immediately when they are informed about a bankruptcy filing.
As soon as you are sued by a creditor, the time is running before a judgment will be entered against you. Use the lawsuit as an incentive to see an attorney right away to find out the various ways the judgment could hurt you, and whether you have any defenses with which to defeat the lawsuit. Also find out whether bankruptcy is an appropriate solution, and whether it you should file a bankruptcy case to stop a judgment from being entered against you in the lawsuit.