What Is a Suggestion of Bankruptcy?

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One of the key features of bankruptcy law is the automatic stay. Under the stay, actions by creditors to collect money must stop. This includes, in most cases, lawsuits. A suggestion of bankruptcy is the form used in many courts to notify plaintiffs that a defendant has filed for bankruptcy.

The Suggestion of Bankruptcy

  • A suggestion of bankruptcy will not halt all court cases. Paternity tests and child support cases may proceed while a debtor is in bankruptcy. Criminal cases also are unaffected by a suggestion of bankruptcy. In many instances, the suggestion of bankruptcy means a case is closed, but individual states and federal law prohibit some debts from being discharged. This means that in some states, a creditor or plaintiff in a lawsuit may be able to permit a bankruptcy judge to allow a lawsuit to proceed.

The Plaintiff

  • A suggestion of bankruptcy only stops a civil suit if it is the defendant who files for bankruptcy. When the plaintiff files for bankruptcy, the court case may continue. This can get tricky because in some bankruptcies, a trustee is empowered to sell or dispose of the assets of the debtor. A lawsuit in which a plaintiff is likely to win can be treated as an asset, and the trustee can be empowered to make decisions on behalf of the bankrupt plaintiff. The trustee may also make decisions that the plaintiff disagrees with, such as when to settle or whether to go to trial.

Multi-party Lawsuits

  • It is important to note that a suggestion of bankruptcy stops actions against the debtor. If the debtor is the only defendant in the lawsuit, the case stops. But if there are additional defendants, the case may proceed. But courts have ruled inconsistently in this area, allowing cases against nondebtors to proceed in some cases and halting them in others, according to an article for the Massachusetts Bar Association by Richard L. Levine.

Counterclaims

  • When a defendant is also suing the plaintiff, this is known as a counterclaim. When a bankruptcy defendant also has a counterclaim, a civil case may proceed. This might be a tough position for some plaintiffs to face. They may end up paying judgments in cases where the target of the suit is immune from a judgment. But according to Levine's article, this is an area in which judges have some discretion. Some counterclaims may be affected by the stay, and others will not.

References

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