Lawsuits
Service of a lawsuit or impending trial often prompts defendants to consider
bankruptcy.
Since the legal theories behind lawsuits can range from the simple collection
action to a complex business tort case, there are no universal answers about
whether the filing of a suit signals time to file bankruptcy.
Here are some things to consider.
The law presumes that if you don't answer the complaint, you agree with the
contention of the lawsuit. Consider answering the lawsuit if 1) you have a
defense; or 2) you want to buy time to consider your options.
If you do not file an answer, the plaintiff (the entity that brought the
suit) can ask the court for entry of a judgment in the amount stated in the
complaint. If no amount is stated, the plaintiff has to put on proof of
the amount of damages; generally unless you answered the complaint, you
cannot participate in the hearing to set the damages.
Once a judgment is entered, the plaintiff can obtain a lien on your assets
and can use the services of the sheriff to levy on your bank accounts and
garnish your wages. If all of your assets and income are exempt
under the law of your state, you may be able to ignore the suit altogether.
Even after a creditor gets a judgment, you can negotiate with the creditor
for the payment of the judgment. Since the creditor incurs expenses and
delay in using legal processes to collect a judgment, you can sometimes
negotiate a discount on the judgment for voluntary payment.
In general a debt represented by a judgment is just as dischargeable as the
same debt prior to entry of judgment. Note, however:
 | A judgment lien that attaches to assets is only avoidable if it impairs an
exemption.
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| If the complaint alleged fraud or other grounds that would make a debt non
dischargeable in bankruptcy, doing nothing may prevent you from later
contesting the facts (i.e. you may be unable to get a bankruptcy court
to hear your side of the fraud charge in a non dischargeability action).
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| In the case of debts that are unliquidated (uncertain in amount),
a judgment will liquidate the debt: that may have the effect of
increasing your debts beyond the eligibility requirements of Chapter 13,
with its "super discharge" and inexpensive reorganization
possibilities. |
Bankruptcy will terminate garnishments as to wages earned after the
filing of the bankruptcy.
Wages earned before the filing may be recoverable from the sheriff or the
creditor if those wages would otherwise have been exempt.
The only possible exception concerns child support collections: in such
cases it depends on what chapter bankruptcy case is selected and whether the
support first came due before the commencement of the case, etc.
Is bankruptcy the solution?
The decision to file bankruptcy should not, in general, be driven by a
single debt, but should be made after considering the total financial
picture, the scope of relief that bankruptcy offers, and the non bankruptcy
alternatives.
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