Can filing bankruptcy stop a debt collection lawsuit against me?

3,358 families filed bankruptcy using Upsolve.

Written by Eva Bacevice, Esq.  
Updated May 16, 2019

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In most cases, yes. In fact, facing a possible judgement or receiving one in a debt collection case is often why you might decide to file for bankruptcy. A debt collection lawsuit is a civil lawsuit (not criminal). These most often occur if a creditor has filed a suit against you for non-payment of a debt which may lead to the creditor garnishing your paycheck.

In this article we will help you understand:

  • What is a debt collection lawsuit?

  • Who are collection companies and what do they want?

  • Wage garnishments: how they work and how to stop them

  • How does a bankruptcy filing affect a lawsuit or a garnishment due to a lawsuit?

    • What is the Automatic Stay?

  • Not all lawsuits are treated the same

What is a debt collection lawsuit?

This type of lawsuit typically occurs after you have stopped paying on a bill. First, 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 the 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.

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Who are collections companies and what do they want?

The lawsuit, and the judgment, is really what these companies are 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.

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Wage garnishment: how they work and how to stop them

How do wage garnishments work?

A court order for a garnishment means that your creditor 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 your mortgage, your car payment and food for your family. And once there is an order and a working garnishment they have no incentive to work with you on a separate repayment 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.

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Remember that not all lawsuits are the same

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 or expect to be involved in.

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Conclusion

Anytime you are involved in a lawsuit, either by you or against you, or even considering filing one, you should consider whether or when to file a bankruptcy case. Sometimes the timing may be very important. Also remember that you should always disclose any lawsuits in your filed documents.

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

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