Basics of Debtor’s Lawsuits in Chapter 7 Bankruptcy

When a debtor files for bankruptcy and has pending lawsuits for unpaid debts, the procedure for handling this situation can be complex. When a person files for bankruptcy, they invariably receive an “automatic stay,” which means that collection efforts on all their debts are temporarily frozen. Typically, the collection efforts remain frozen while the bankruptcy case is resolved, although there can be exceptions. For most types of pending lawsuits involving debts, the lawsuits will simply be resolved in the context of the bankruptcy itself. In other words, the underlying debts will be discharged along with the other debts identified in the bankruptcy. Certain cases, such as those involving unpaid child support, cannot be discharged, and so the fate of the lawsuit will be completely different. In rare cases, creditors can actually petition the court to have the automatic stay lifted and then pursue the underlying debt as normal. What about pending lawsuits where the debtor is the Plaintiff/Petitioner suing another party for money damages? The fate of these cases is entirely different. Suppose a person is involved in a classic “slip and fall” accident and then pursues a lawsuit to recover medical costs and other damages. This same person then files for bankruptcy while the lawsuit is still ongoing. In this type of situation, the trustee will essentially step into the shoes of the debtor, and will constructively receive the funds if the lawsuit is successful. In most cases, if the lawsuit is successful, the trustee will use the funds to pay back creditors in the bankruptcy. In a case such as the hypothetical one described here, the money received from a successful lawsuit would presumably be used to repay the medical bills, and excess funds would be used to pay back other creditors.

Planning a Course of Action

This raises the question: how should a person go about planning things if they are contemplating bankruptcy and a lawsuit for damages at the same time? If the person wishes to avoid having the money from a successful lawsuit transferred to the trustee, then he or she should simply postpone filing bankruptcy until the litigation is finished. In fact, if the lawsuit results in an award of money damages, the debtor can then use the money to pay back his or her creditors and avoid a bankruptcy filing. In some instances, it may be feasible for a debtor to collect the money from the lawsuit, and then go about entering a bankruptcy. This may allow a debtor to preserve some amount of capital even after the bankruptcy is declared. The recommendation for any particular case depends on the specific circumstances involved, however. If, for instance, the debtor doesn’t anticipate that the lawsuit will generate a sizable amount of money, then this may not be an adequate reason to postpone the bankruptcy. The debtor may actually benefit more from simply filing bankruptcy and then allowing the funds to be transferred to the trustee. The best course of action depends on a careful examination of the situation.

Contact Financial Freedom Advocates for More Information

At Financial Freedom Advocates, we believe strongly that bankruptcy can be a powerful tool for building a new and brighter financial future. We see bankruptcy as an instrument to help people move forward and create a new financial condition. In most cases, this type of relief is sought by honest, hardworking people who simply made mistakes or miscalculations. To learn more, please contact us by calling 786-668-6688.