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Lawsuits and Bankruptcy

The commencement or threat of a lawsuit sued often drives some people to consider filing for bankruptcy to avoid liability.  On the other hand, some people may think that threatening to file bankruptcy will discourage potential plaintiffs from filing suit.   While bankruptcy will eliminate liability for many types of judgments, be sure to consult with an experienced bankruptcy attorney before making the decision to file.  There are many different “causes of action” for which lawsuits are filed (i.e. breach of contract, tort, fraud, etc.), and depending upon the particular circumstances of your case, bankruptcy may or may not be the right solution for you.

Once a lawsuit is filed, there are various issues that will arise along the way that will not only affect the outcome of the case, but may also affect the ability to discharge a judgment entered against you in bankruptcy.  After being served with a copy of the complaint, the first step is to understand exactly why you are being sued.  You might be advised to not respond to the complaint and simply file bankruptcy so the plaintiff won’t be able to collect.  Be careful, because this may not necessarily be true.  Depending upon the nature of the allegations or upon the extent to which the lawsuit proceeds (i.e. the plaintiff goes so far as to actually obtain a judgment lien), the debt might not be dischargeable.

If you do not respond to a complaint, the court will eventually enter a default judgment against you for an amount of damages either alleged in the complaint or proven in court.  The plaintiff/creditor will then likely obtain a judgment lien that will attach to your assets.  At that point, filing the relief offered by filing bankruptcy will be limited.  Liens make the collection process easier as they allow plaintiffs/creditors to garnish wages and/or levy (i.e. seize) assets.  Bankruptcy will temporarily stay (i.e. stop) such collection actions, but the liens will eventually be satisfied with available assets from your bankruptcy estate UNLESS your assets are protected under one or more exemptions.

Likewise, assume for instance that the complaint against you alleges fraud.  If you do not respond to the complaint (i.e. do not put up a defense), you will be treated as if you admit to the allegations.  If that is true, the plaintiff/creditor will be given a judgment for damages based on fraud, and damages for fraud are not dischargeable in bankruptcy.

As you can see, there are many pitfalls that might be encountered without proper planning, so please consult with a bankruptcy attorney before making a decision that might ultimately leave you unprotected.

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