How Can Bankruptcy Stop Lawsuits?

The Use of Automatic Stays to Avoid a Lawsuit

The use of bankruptcies to thwart lawsuits can supply some relief from lawsuits but it is not a surefire method of avoiding a lawsuit. In addition, there are some kinds of lawsuits that cannot be removed by a bankruptcy. It is always recommended that an individual consult an attorney before proceeding with a request for bankruptcy.
Bankruptcy filings by an individual provides for an automatic stay. Automatic stay requires that an a company pursuing a creditor claim against an individual cease as of the date the bankruptcy court approve the petition. As a result, many legal claims and lawsuits are effectively ended as well as the ultimate financial allocation, if any, will be made by the judge. Automatic stays do not cover all kinds of lawsuits however. Lawsuits involving certain federal loan programs, IRS tax cases, including college loans are not included. Child support and lawsuits involving criminal prosecution are specifically not included as part of an automatic stay.

Actions of the Bankruptcy Court

If the petition for bankruptcy is granted and the automatic stay is effective the statute governing the actions of the lender is 11 U.S.C. 362(a). Under its provisions the following actions are specifically prohibited: the filing or pursuit of any lawsuit against you; placing a lien on your property; taking your property to satisfy a recorded lien; repossessing; discontinuing any service or benefit that you are currently getting or evicting you. Note that anyone seeking a claim against a bankrupt party that fails to heed these rules is subject to contempt of court and possible legal action themselves.

Mediation or Negotiation and the Threat of Bankruptcy

Oftentimes, the besieged creditor can take action prior to bankruptcy and come to an understanding with the lender. The creditor, with legal counsel available, can sometimes negotiate an agreement that reduces or eliminates the contested amount due. The borrower will often consider a reduced amount because under bankruptcy the final determination of the creditor's ability to pay is determined by the judge. It is important to realize that threatening a bankruptcy might force the creditor into bankruptcy if negotiations fail. Accordingly, a creditor seeking to renegotiate a loan must be prepared to follow through with the bankruptcy.

References

• Article on Bankruptcy Filing
• Lawsuits and Bankruptcy

Resources

• Attorney's Ability to Deflect Harassment