When you file Bankruptcy, you stop all collection activity against you, which includes any lawsuits or garnishment filed by creditors in an attempt to recover funds from you. That is the due to the very powerful Bankruptcy Automatic Stay.
Filing a Lawsuit During Bankruptcy
But, what about if you have filed a lawsuit (or intend to file a lawsuit soon) against another person or entity? What happens to this lawsuit once you file for Bankruptcy Protection? Can you, the Bankruptcy filer, continue with this lawsuit? The short answer is “Yes”, but you need to notify your bankruptcy attorney of the lawsuit or potential lawsuit and they will need to notify the Bankruptcy court that you are currently in a lawsuit or you have the right to sue someone in a lawsuit. Your Bankruptcy attorney must list the pending lawsuit or potential lawsuit in your Bankruptcy schedules (Schedule B) and also on your Statement of Financial Affairs. The proceeds you will receive in the future are considered by the Court as a potential asset.
What happens if you do not list the pending lawsuit in your Bankruptcy petition? If the lawsuit is not listed in your Bankruptcy Petition and you receive a discharge of your debts, the general rule is that you are stopped from continuing on with the lawsuit. This is the principle of “judicial estoppel.” You are stopped from continuing with the lawsuit because your Bankruptcy petition indicated you did not have any claims against anyone and/or you did not have the right to sue anyone at the time your Bankruptcy petition was filed. The Bankruptcy court assumes that if you did have any rights you would have listed them as a potential asset in your case. You cannot say that you do not have any claims or potential claims in your Bankruptcy case and proceed to discharge all your debts in that Bankruptcy case. Followed by going after someone in State of Federal Court to receive money when the reason for the lawsuit existed prior to your Bankruptcy filing. For instance, if you had a car wreck and were injured back in July of 2015 and file for Bankruptcy protection in December of 2015, you must list the potential lawsuit in your Bankruptcy or you very well might be forever barred from recovering any proceeds from your injuries.
So it is really important when you are contemplating filing Bankruptcy for you to choose a competent bankruptcy attorney who knows how to list the lawsuit on your Bankruptcy Petition in order to protect the proceeds from any lawsuit recovery in the future. Choosing a poor bankruptcy attorney can cause you to lose that potential future monetary windfall.
The attorneys at Bond & Botes have collectively filed 1000’s of Bankruptcies and have over 150 years of aggregate Bankruptcy experience and, thus, will see that your assets are protected.
If you have questions regarding any aspect of Bankruptcy in Alabama, Tennessee or Mississippi, please call one of our Bond & Botes affiliated offices. We offer free initial consultations so feel free to call one of our conveniently located offices to set up a private consultation with one of our experienced attorneys. If you have questions regarding Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, stopping foreclosure or wage garnishment, avoiding liens, stopping lawsuits, discharging debts, etc. We can help!
We will analyze your situation and help you make the best decision possible to help you with your financial problems.
Grant McNutt is a Managing Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Science from the University of Alabama, and a Juris Doctorate from the Birmingham School of Law. He has been practicing Consumer Bankruptcy Law since 1999. Read his full bio here.