Filing for bankruptcy will stop a civil lawsuit in its tracks. The automatic stay—the order that prohibits creditors from pursuing you during your bankruptcy case—will go into effect and bring it to a halt. The plaintiff (the person or company suing you) will have the responsibility of informing the court that the stay is in place. From a practical standpoint, it makes sense for you to let the court know about the case, too. If you’re represented by counsel, your attorney will likely provide notice to both the plaintiff and the tribunal.
What will happen next? Nothing. You’ll be off the hook entirely unless the creditor does one of the following things:
- convinces the court to lift the automatic stay so that the trial can continue to move forward, or
- files and wins an adversary proceeding (a lawsuit) alleging the same matter in bankruptcy court.
What are the chances that the creditor will pursue the case? Many times, the creditor won’t bother taking either action—especially if the judgment won’t survive bankruptcy (for instance, the judgment is for a credit card debt without a fraud allegation and you’ve filed for Chapter 7 bankruptcy). You can learn how to identify dischargeable judgments by reading Personal Bankruptcy and Court Judgments.
Also, pursuing litigation is expensive, and if you’re bankrupt, there’s probably no money to be had. A rational creditor won’t throw good money after bad.
However, each case—and each creditor—is unique. For instance, if you file a Chapter 13 case, it’s less likely that the plaintiff will let the action go because you’ll have to pay into a repayment plan for three to five years. Simply put, the creditor might stand to gain something.
As well, it’s important to keep in mind that angry people tend to pursue litigation out of a need for vengeance rather than a monetary incentive. So your case might continue if you’re facing an adversarial opponent, such as a spurned ex-spouse or business partner. In that case, filing bankruptcy might serve to move your lawsuit to a new forum only—the bankruptcy court.
Or, a large company—such as a utility company—might want to take a stand against fraud and pursue the case even if it doesn’t expect to recover money. A win would allow the company to continue to collect the amount owed (it wouldn't get discharged), and might allow it to refuse to provide the customer service unless specified conditions were met, such as the customer paid an unusually large deposit. (You’ll find more information in the article What Happens If You Can't Pay a Utility Bill?)
Also, keep in mind that bankruptcy judges don’t shrink from punishing questionable conduct. If one of the above situations exists and your case isn’t very sympathetic, a bankruptcy court might not be the best place to resolve the issue. To learn about your chances of success in front of local bankruptcy judges, talk with a bankruptcy attorney who practices in your area.
Go to the main bankruptcy FAQ page.