Many times bankruptcy is filed in order to stop a lawsuit. 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 the person you are suing. This means that if the debtor lists you as a creditor (and sometimes even if they don’t), you may have no legal right to collect a judgment from him or her, even in pending litigation. Further, if you continue your efforts to collect at this point, they can sue you for violating their rights.
Some debts cannot be discharged through bankruptcy. If your lawsuit involves fraud, intentional harm or tortuous conduct as an allegation, a defendant may not discharge a judgment in your favor 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 you can still try to collect in these cases, because bankruptcy does not take away your legal rights to collect from the debtor.
If your case is subject to the debtor’s automatic stay, not all hope is lost. Creditors and plaintiffs may 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 that bankruptcy courts may grant relief from the automatic stay including relief for cause and relief 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 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.