Can You Be Sued If You Are Filing a Bankruptcy?
Filing for bankruptcy is a serious financial process that places debts and assets in the hands of the bankruptcy court. The court appoints a trustee to manage the bankruptcy estate and take care of the debts. The bankruptcy may sell off key assets, but it can also cancel debts and can often stop problematic situations like creditor lawsuits.
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Automatic Stay
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An automatic stay is a court order created when a debtor files for bankruptcy. It automatically stops any other legal processes that the debtor is facing, including creditor lawsuits and similar creditor filings like foreclosures. The bankruptcy takes precedence over all these other actions, and the court will deal with debts before allowing lawsuit processes to continue. Many debtors who are faced with a lawsuit by creditors attempting to seize their assets file for bankruptcy in order to stay the suit and save their possessions.
Creditor Actions While in Bankruptcy
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The automatic stay affects not only past creditor actions but also future actions. Creditors are unable to file lawsuits against a debtor while the debtor is in the midst of a bankruptcy and will typically be notified that they should cease demanding payment, at least until the bankruptcy is resolved. Many creditors may ignore this and continue requiring payments until they receive some type of official notice and may threaten a lawsuit even though the stay prevents such actions.
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Overturning Stays
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A creditor does have the ability to respond to a bankruptcy by submitting a plea for overturning a stay. A judge will examine the creditor's argument before deciding whether to remove the stay or not. Often creditors must show that the debtor actually has enough money in a secured asset, such as a house used for collateral in a mortgage, to pay for the debt before the judge will agree to let a suit progress. This is uncommon for unsecured debts, like credit card debts, which do not have any specific assets used as collateral.
After Bankruptcy
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Debtors should be very careful after the bankruptcy is finished, and the debts have been cancelled. While a creditor may no longer have a debt to collect it may still have a lien against the borrower's property and may be able to pursue eventual legal action. For instance, a tax lien against unpaid property taxes will continue even after a bankruptcy, since this type of lien cannot be discharged. This can also occur with mortgage liens, since in both cases, there is at least some value in real property that the lien holder -- government or lender -- can claim even after the bankruptcy .
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