One leading reason for people to consider filing a bankruptcy case is becoming a defendant in a lawsuit. In many cases, being served with a lawsuit is the “last straw” that makes people who have been trying to fight off their financial problems change course and decide to file a bankruptcy case.
So what happens with the lawsuit when a bankruptcy case is filed? The automatic stay provisions of the law, found in section 362 of the Bankruptcy Code, protects all individuals who file a bankruptcy case from any action to collect on a debt after the filing of the case. The automatic stay truly is “automatic” – when a case is filed, the Bankruptcy Court issues a notice to all creditors listed in a bankruptcy petition that orders the creditors to discontinue any attempt to collect debts from the bankruptcy debtor.
What does that mean with lawsuits that have not yet made their way through the court system? The filing of the bankruptcy requires that the party prosecuting the lawsuit stop all court proceedings. So if the lawsuit is scheduled for trial, that trial is cancelled. If the lawsuit is in the discovery phase, where parties are being deposed or written interrogatories are pending, all discovery is discontinued.
As you can see, bankruptcy is a powerful tool to use if you are on the wrong side of a lawsuit. Not only will the filing of a bankruptcy case prevent a judgment from being taken against a bankruptcy debtor, it will eliminate the debtor’s obligation to continue paying attorney fees to defend the lawsuit.
There are certainly “best practices” that should be employed when a lawsuit defendant decides to become a bankruptcy debtor and stop litigation. Speaking with one of our attorneys at Kain & Scott is a good way to learn whether a bankruptcy will pull you out of a lawsuit – and protect you and your family financially.
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When the time is right, or when you are ready, reach out to Minnesota’s largest bankruptcy website at www.kainscott.com. You will be glad you did!
