Bankruptcy can help a lawsuit depending on the type of lawsuit you’re involved in. The most typical kind you might be facing is if a creditor has filed a civil suit against you for non-payment of a debt which may lead to the creditor garnishing your paycheck.
Written by Attorney Jonathan Petts.
Updated December 28, 2020
The short answer
Usually yes. In fact, facing a possible judgement or receiving one is often why you might decide to file a bankruptcy.
The longer answer
It truly depends on the type of lawsuit. Usually when someone asks about a lawsuit they are talking about a civil lawsuit (not criminal). The most typical kind you might be facing is if a creditor has filed a suit against you for non-payment of a debt which may lead to the creditor garnishing your paycheck.
Common Lawsuits for non-payment of debt
First, let’s talk about what happens in this type of lawsuit. Usually after you have stopped paying on a bill the company will send you late notices for a few months. Then after a period of time they will sell the uncollected debt to a collection company, usually for pennies on the dollar. It tends to be the collection companies who get really aggressive, because they only way they make money is if they get you to pay. This can lead to really unpleasant situations, such as repeated phone calls, threatening letters, and eventually a lawsuit.
Who are collections companies and what do they want?
The lawsuit, and the judgment, is really what these companies are usually aiming for, because remember that their entire purpose is to get you to pay. Usually what happens is that you don’t respond to the lawsuit because you can’t afford an attorney to help you fight the case. Which makes perfect sense, if you had money you’d be able to pay your bill and not be in this mess in the first place.
But this is exactly what these creditors are counting on. Because if you do not respond to a lawsuit by filing a response (either on your own or with the assistance of an attorney) the creditor will receive something called a default judgment from the court against you. And once they have that court order, they can provide that to your payroll department and garnish your wages or go after your bank account.
Wage garnishment: how they work and how to stop them
How do wage garnishments work?
A court order for a garnishment means that they can get their money off the top of your paycheck before you even see it, or seize money directly from a bank account. Which can make it really hard to keep up on your other important payments, like rent or mortgage, your car payment and food for your family. And once there is an order and a working garnishment they have no reason to work with you on a payment plan.
How does a bankruptcy filing affect a lawsuit or a garnishment due to a lawsuit?
The good news here is that this is the exact type of situation where filing a bankruptcy can really help you. Why? Because filing a bankruptcy creates something called an “automatic stay” which in effect pushes the pause button on any ongoing lawsuit. So if a creditor is threatening a lawsuit or has already filed one and you file your bankruptcy that lawsuit will be stopped for the period of your bankruptcy.
So what does this mean in the situation outlined above? It means that if you file a bankruptcy after a lawsuit has been filed against you but before the default judgment you can avoid a garnishment all together. And if you file a bankruptcy after you have already started being garnished, that garnishment has to stop immediately and you can get your money back if they take it after your filing date.
The even better news? If we are talking about an unsecured debt (like credit cards or medical bills) these debts will be discharged at the end of a successful Chapter 7 bankruptcy, so the lawsuit will completely go away once you receive your discharge.
Are all lawsuits the same?
No. This why the short answer said “usually” and the longer answer started with “it depends.” There are some lawsuits or judgments which are not impacted by filing a bankruptcy case. Most common is when there is a court order for alimony or child support. That debt is considered non-dischargeable, so you must continue to pay and pay back any arrearage (missed payments.) You also cannot walk away from any judgment regarding fraud. Criminal cases and some civil cases also do not go away in a bankruptcy. You should always disclose any lawsuits you are involved in to an attorney to find out the specifics for your case.
What if I have a lawsuit against someone else?
A bankruptcy can also impact you if if you have a case against someone else. If you have received a judgment in your favor, or are in the midst of a court action, any proceeds you receive will end up becoming a part of the bankruptcy estate, meaning that the Chapter 7 trustee can take those funds and use them to repay your creditors. This can be an issue even if you haven’t started a lawsuit, but you have a cause of action that you are considering.
Anytime you are involved in a lawsuit, either by you or against you, or even considering filing one, you should speak with an attorney or legal aid about whether or when you should file a bankruptcy case. Sometimes the timing may be very important. Also remember that you should always disclose any lawsuits in your filed documents.
Having a lawsuit filed against you and may be the reason that you do decide to file if it means avoiding a garnishment. Remember that you should always disclose any and all lawsuits (either by you or against you) to an attorney to be reviewed as part of deciding whether, and when, to file your case.