How Do Collections Lawsuits And Bankruptcy Affect Each Other?

Being sued on a debt is a major motivating factor that leads people to file for bankruptcy. Lawsuits can be scary, and for many people, bankruptcy’s ability to stop a collections lawsuit in its tracks is very appealing, as it should be.

But how do bankruptcy and creditor lawsuits interact? What happens when you have a lawsuit filed against you for money you owe, and afterwards you file for bankruptcy?

Bankruptcy Ends the Lawsuit

You may be worried you have no defenses to your collections lawsuit (although there are defenses to them). That’s OK. When you file for bankruptcy, you don’t need to defend any creditor lawsuits. Your discharge in your bankruptcy is not dependent on you having defenses—in fact, even if you have no defenses at all, and readily admit you owe every penny the creditor says that you owe, you still can file for bankruptcy and get your discharge.

The Collections Suit Stops

Aside from getting your discharge, when you file your case, your collections lawsuit will immediately stop because of the automatic stay.

The automatic stay prevents any creditor from collecting, or even trying to collect any debt from you, whether you owe the debt or you don’t. That includes actions that aren’t related to the lawsuit, like collection calls or sending collection letters—all of this activity must stop.

Any collections lawsuits that are already filed against you must immediately stop, no matter where in the process the lawsuit may be. Even if the lawsuit is done, and you’ve lost, and a judgment has been entered against you, any collections activities on the judgment entered against you must stop.

Challenging the Debt

Should you still challenge what a creditor says that you owe, once you file for bankruptcy? That depends on what chapter you file.

With a Chapter 7, you will be getting a discharge of the debt either way. It doesn’t matter if the creditor’s claim is legitimate or not, or whether the amount owed is correct or not. The creditor will be wiped out anyway, and there is no difference between wiping out $100, $10,000 or $100,000.

With Chapter 13, there may be more motivation for you to challenge a claim by a creditor that you feel is incorrect or inaccurate. This is true because sometimes, if you have assets that are more than your exemptions, you may have to pay some amount through the course of your Chapter 13 payment plan to your creditors.

How much you pay every month during your plan depends on a number of factors, including your assets, income, and the amount you owe. By lowering (by challenging) a creditors’ claim, if you are correct, you are lowering the total amount owed as claimed by your creditors. This can lower the amount of your payment.

Are you getting sued by a creditor, or do you have creditors harassing you? Bankruptcy can end all of that. Call the West Palm Beach bankruptcy lawyers at Kelley Kaplan & Eller at 561-264-6850 for help.