Will a Bankruptcy Stop It if I Was Sued for a Liability?
Filing for bankruptcy usually stops all collection practices against you, including liability lawsuits, until you emerge from bankruptcy. You may also elect to include civil judgments against you resulting from lawsuits in your bankruptcy to either attempt to expunge these debts altogether or incorporate the debts in a repayment plan. Some liability lawsuits, including those stemming from criminal actions, may prevent you from successfully filing for bankruptcy protection.
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The Automatic Stay
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The automatic stay granted by the court when you file for bankruptcy halts all civil legal proceedings brought against you by creditors or clients. This applies to anyone who sues you for reasons relating to liability. In short, if a creditor or consumer wants your money, they have to wait until the bankruptcy court is through processing your request for relief. The fact that you have pending lawsuits against you should not affect the status of your bankruptcy or cause bankruptcy proceedings to stop.
Liability Insurance Coverage
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If a business client filed a lawsuit against you before your bankruptcy filing, any existing professional liability insurance you have can protect you from direct financial responsibility. Using your liability insurance to pay out a client's liability claim against you shouldn't hurt the progress of your bankruptcy filing, though it's a smart idea to inform your attorney and make the bankruptcy court aware of the suit. The lawsuit must stop once you file for bankruptcy because of the automatic stay so if you have not paid the claim, you won't have to until you emerge from bankruptcy.
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Uncertain Judgments
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The monetary award in a civil lawsuit is uncertain until the plaintiff receives a judgment that fixes or liquidates the judgment. The amount of the judgment could push you out of eligibility for Chapter 13 bankruptcy restructuring and force you to file for Chapter 7 bankruptcy liquidation. This means you may not be able to keep assets including business properties and homes if you cannot exempt them from liquidation under your state's bankruptcy laws. Filing for bankruptcy before a plaintiff obtains a judgment against you is key to stopping the lawsuit and preserving your bankruptcy filing.
Liability Alleging Fraud
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If a civil liability case alleges fraud against you, including auto accidents involving intoxication and restitution resulting from criminal charges, a judgment may prevent you from including the debt in your bankruptcy case or halting legal proceedings while your bankruptcy is in process. This means you cannot include the judgment in a court-approved repayment plan as per Chapter 13 bankruptcy or expunge the debt through Chapter 7 liquidation. This type of debt survives the bankruptcy process intact, and you must pay it in full.
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