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11 April 2016
 April 11, 2016

Bankruptcy a Last Resort - When It Makes Sense to FilePending lawsuits definitely have an impact on bankruptcy proceedings regardless of which side of the lawsuit you are on. If you are the plaintiff, particularly in a personal injury suit, that suit will partially determine the court’s decision regarding your bankruptcy procedure. If you are the defendant, bankruptcy may or may not protect you in the event the lawsuit results in a judgment against you.

In this post, we will lay out the basics of how pending lawsuits and bankruptcy interact. However, this is a complex area of law that cannot be done proper justice in such a short piece. If you have any questions about your own circumstances surrounding bankruptcy and pending lawsuits, we strongly urge you to contact an attorney for help. Our expert attorneys can consult with you and, if necessary, represent you in court.

Plaintiffs in Personal Injury Suits

Federal bankruptcy law requires people filing for personal bankruptcy to disclose all pending lawsuits as well as any circumstances that could result in a lawsuit in the future. We offer personal injury suits as an example because these provide the best illustration.

Consider Plaintiff A, who decides to file bankruptcy after a notice of claim has been filed in a personal injury case resulting from a car accident. The plaintiff is required to inform the bankruptcy court of the pending lawsuit and many of its details. A failure to do so could result in the bankruptcy being dismissed, the personal injury claim being denied, or both.

Plaintiff B also decides to file bankruptcy just a few days after a slip and fall accident caused significant injury. Even though the plaintiff has neither retained an attorney nor filed any preliminary lawsuit paperwork, he or she still must inform the bankruptcy court that the conditions exist for a potential lawsuit in the future. Failing to do so could jeopardize the bankruptcy proceeding.

Lawsuit Defendants

The other side of the lawsuit equation deals with plaintiffs who are currently litigating at the time of bankruptcy. The law allows for something known as an ‘automatic stay’ at the moment the personal bankruptcy is filed. Simply put, an automatic stay brings an immediate halt to any action being taken against the person filing bankruptcy until the defendant and his or her attorneys can work out an acceptable bankruptcy plan.

Upon filing a bankruptcy petition with the court, the court issues the automatic stay and then notifies creditors of that order. The court also notifies all parties participating as plaintiffs in a lawsuit against the person filing bankruptcy. Nothing more need be done by the defendant.

Please bear in mind that it could take several weeks for plaintiffs to receive notification of the automatic stay. Therefore, the defendant’s attorney may advise that the plaintiffs be informed right away to prevent any further action in the case.

An automatic stay issued by a bankruptcy court takes precedent over any civil action, at least on a
temporary basis. However, there is no guarantee that bankruptcy will stop a civil proceeding in its entirety. Bankruptcy courts do have leeway to allow civil lawsuits to proceed during, or after, a bankruptcy case.

Civil lawsuits and bankruptcies intersect in state and federal courts all the time. Knowing where you stand in any such case is important in determining the best course of action. We advise you seek the advice of an attorney if you find yourself in the midst of either a civil lawsuit, a bankruptcy proceeding, or both.

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