Just like consumer bankruptcy can stop home foreclosure, wage garnishment, vehicle repossession, and most other types of adverse creditor action, bankruptcy can also stop lawsuits. Even if the trial is scheduled for tomorrow, bankruptcy can halt it.
For many people, a creditor lawsuit is a remote, theoretical possibility. They know it can happen, but they do not believe it will ever happen to them. Suddenly, there’s an unfamiliar knock on the door at an unusual hour and someone, usually a Minnesota peace officer, delivers a summons.
Many large moneylenders, such as credit card companies, file lawsuits automatically after a certain number of delinquent payments. Since they are usually local, credit unions often file faster than banks. Other times, the Minneapolis summons comes as no surprise. These latter instances are sometimes easier to deal with outside bankruptcy, as outlined below.As we’ve examined in previous posts, bankruptcy offers both temporary and permanent solutions in this area.
Immediate Relief
Way back in 1915, Supreme Court Justice James Clark McReynolds wrote that the bankruptcy process must “relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Over a century later, this fresh start is at the heart of the Bankruptcy Code. The new start begins with the automatic stay.
In a Minneapolis criminal court, a defendant must essentially prove prosecutorial misconduct or some other serious error to obtain a stay of execution. Very few of these requests succeed. But in bankruptcy court, debtors need only file paperwork to obtain a financial stay of execution. The Bankruptcy Code takes care of the rest.
Section 362 applies to a wide range of situations, including lawsuits. If the civil action involves money or property, the automatic stay usually applies. This list includes:
- Claims for money damages (i.e. a car accident lawsuit),
- Home foreclosure actions,
- Most eviction lawsuits,
- Collections actions, and
- Suits on accounts.
To re-start the lawsuit before the bankruptcy judge issues a discharge order, the civil plaintiff must essentially convince the judge that if the lawsuit does not move forward immediately, the plaintiff will suffer irreparable harm. In a claim for money damages, that’s usually impossible to do.
Debt Discharge
The automatic stay is only the beginning. After a short waiting period in a Chapter 7 or an extended repayment period in a Chapter 13, the Minnesota bankruptcy judge discharges most unsecured debts. That includes things like:
- Credit card debt,
- Medical bills,
- Most government debt, and
- Payday loans.
This order terminates the debtor’s legal obligation to repay the debt. Since that obligation goes away, the money-based lawsuit goes away as well. The discharge order also applies to potential liabilities, such as possible future court judgements.
Once again, Domestic Support Obligations like child support are about the only exception. Bankruptcy is designed to help the debtor and not hurt the debtor’s children.
How It Works
Section 362’s automatic stay take effect as soon as the creditor receives notice of the filing. Typically, this notice occurs almost immediately, since most moneylenders are wired into the bankruptcy ECF system. But many courts are not electronically linked to bankruptcy filing data. So, to make sure that the notice goes out straightaway, a Minnesota lawyer will file a separate suggestion of bankruptcy in the appropriate court. This document also provides notice to the civil plaintiff or the plaintiff’s attorney as well as third parties like court reporters.
Some law firms charge extra for this service. But at Kain & Scott, we normally do not, because we feel that a suggestion of bankruptcy is an important component of your family’s fresh start.
Typically, the court stays the lawsuit unless the civil plaintiff establishes that the lawsuit has nothing to do with the bankruptcy or the bankruptcy judge has granted relief from the automatic stay. If the civil plaintiff loses the subsequent hearing, the judge usually dismisses the lawsuit altogether.
Some Available Non-Bankruptcy Alternatives
As mentioned earlier, there are some ways to stop a lawsuit, or perhaps settle it on favorable terms, without filing bankruptcy. The b-word often carries significant weight, especially in actions like one-on-one contract disputes that involve a significant amount of money. A bankruptcy threat usually means little to credit card companies and other such moneylenders. If a borrower files bankruptcy, they simply write off the debt.
In other disputes, such as a homeowner against a Minneapolis home improvement contractor, a bankruptcy threat is often effective. That’s especially true if there is any dispute as to the amount owed. So, these plaintiffs or potential plaintiffs are often willing to negotiate a quick settlement and receive something as opposed to nothing.
It’s important to only undertake such negotiations when you have an experienced Minnesota bankruptcy attorney in your corner. Only a lawyer like this understands all the nuances of a bankruptcy as it relates to a civil lawsuit.
If you are or soon may be facing a civil lawsuit that involves money or property and you don’t know what to do, contact an experienced bankruptcy attorney in Minneapolis from Kain & Scott, P.A. for a free consultation. We have nine office locations throughout Minnesota.
