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What Happens When A Defendant Files for Bankruptcy in The Middle Of Your Civil Lawsuit?

You have filed your civil lawsuit and have begun your legal proceedings in order to obtain damages from defendant; however, now you have been informed that the defendant has filed for bankruptcy, now what?

When a defendant files for bankruptcy in the middle of litigation that can put a halt on your civil case, or at the very least a temporary stop. The person filing bankruptcy is provided an order called an automatic stay, which bars creditors from pursing them during their bankruptcy case. Meaning your civil case will stop while they proceed in their bankruptcy case. Often the bankruptcy will discharge (wipe out) almost all their debts, there are a few exceptions such as family support debts and student loans.

Generally, this will stop your civil case against defendant; however, there are a few instances where you can continue your case against defendant. If you receive notice that they have filed bankruptcy it is important to look at what kind of bankruptcy they filed, either a chapter 7, 11 or 13, and to move quickly as there are strict deadlines to follow regarding any future filings.

If they filed a chapter 7 you’ll need to take a hard look at if it’s worth continuing your civil case as chapter 7 allows discharge of most debts and often if they filed a chapter 7 they likely do not have enough assets to assist you in collecting against them, should you be able to obtain a judgment against them.  Essentially you need to consider, is it worth spending money going after someone who has nothing?  Am I going to spend more than what I will likely recover?

The other option is to file an adversary claim against the defendant in the bankruptcy court within the allotted provided under the bankruptcy code.

What is an adversary proceeding?

An adversary proceeding is filed in the bankruptcy court within the persons bankruptcy case. Essentially, it is bringing your lawsuit into the debtor’s bankruptcy case. Procedurally you would need to file a complaint with the bankruptcy court. The complaint lays out the facts of the case and requests that the court enter a judgment against the debtor.

There are various reasons to file an adversary proceeding but the most common is requesting the court not discharge (or wipe out) the debt owed to you because of fraud – if you allege that the debt was incurred because of fraud. These are very fact specific allegations that will be brought before the bankruptcy court in an attempt to have the judge deem the debt nondischargeable. If a debt is deemed nondischargeable, it means the debtor is still liable for that particular debt regardless of the discharge they may receive in the bankruptcy case.

Dealing with the uncertainty of continuing against a defendant in bankruptcy court can be a tricky decision and it best to obtain legal advice from an experienced attorney early on to avoid the not letting the deadlines to file lapse. If you need assistance in reviewing your case give our office a call for a free consult.

By: Iris Gomez, Esq., Attorney at Contreras Law Firm

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