Suing Someone Who Just Filed Bankruptcy

When a Person in Bankruptcy Won't Have to Pay

Once a person or business files for bankruptcy, there will be what is known as an automatic stay put on the money the debtor owes. The automatic stay is a legal tool that protects a person being sued.

This means that if a debtor lists an individual as a creditor (and sometimes even if they don’t), that individual may have no legal right to collect a judgment, even in pending litigation. Further, if the individual continues efforts to collect at this point, they can be sued for violating the rights of the debtor.

When a Person in Bankruptcy Will Have to Pay

If a lawsuit involves fraud, intentional harm or tortuous conduct as an allegation, a defendant may not discharge a judgment by filing bankruptcy. Criminal judgments, which often involve fines, cannot be stopped through filing for bankruptcy.

Further, other debts such as federal loans, some IRS debt, child support, alimony, and secured debts cannot be discharged through bankruptcy. This means that entities collecting on these debts still have a legal right to collect. 

Ways Around the Automatic Stay - File a Motion

In some cases, there are ways around the automatic stay for a creditor to collect from someone in bankruptcy. Creditors and/or plaintiffs can file a motion to request relief from the automatic stay with the bankruptcy court. The creditors and plaintiffs that most often obtain relief from the automatic stay are those that can show that the automatic stay will have an adverse affect on their contract rights, their property or their legal claims.

Secured creditors, persons with claims that are non-bankruptcy related, lessors, co-owners or cosigners, and persons with set-off rights, typically file a motion to request relief. There are two reasons bankruptcy courts may grant relief including for cause and due to lack of equity in debtors property. In proving relief for cause, a creditor or plaintiff must show that there is no protection for them through the automatic stay, because the debtor has falling property values or does not have any collateral.

In addition, they must show that their lawsuit is unrelated to the bankruptcy or that the automatic stay places some unjustified burden on the person interested in the debtors’ property.

Courts have also granted relief for cause when the debtor has failed to diligently carry out his or her bankruptcy duties or is using bankruptcy as a means to delay payment. In proving relief due to lack of equity in property, a creditor of plaintiff must show that because the debtors’ property is valueless, the people with an interest in the property should not be subject to the stay.

In deciding if the stay should be lifted, the court uses both bankruptcy law and principles of equity or fairness. The court can choose to lift the stay completely, or modify the stay for the particular situation.