Removing Bankruptcy's Automatic Stay: Lawsuits and Insurance Claims

Courthouse gavel

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An automatic stay is a powerful tool that comes to your aid when you file a bankruptcy case. It is an injunction that prohibits creditors from starting or continuing certain actions to collect a debt without permission from the bankruptcy court. Without the automatic stay, the bankruptcy system would collapse. It prevents creditors from pulling the debtor apart piece by piece, and it levels the playing field among the creditors. 

Almost every lawsuit pending against you when you file for bankruptcy will stop moving through the courts, at least temporarily. Depending on the type of lawsuit, the creditor could ask the bankruptcy court for permission to continue. In general, if the subject of the suit concerns your property or your money, the bankruptcy court will take an interest and will not allow it to go forward. If the lawsuit isn't likely to have a significant effect on your assets, the court will generally allow it to proceed.

Lawsuits on Various Types of Debt

Credit card debt and other forms of personal loans will likely get discharged in a bankruptcy case. Therefore, if a lawsuit concerns these types of debt, the court will not grant permission to proceed. There would be no point in the lawsuit since the debt will be discharged in the bankruptcy case.

On the other hand, if the lawsuit could potentially lead to a determination that the debt will not be discharged, the bankruptcy court will either let the civil lawsuit continue or move the lawsuit into the bankruptcy court. These lawsuits usually address issues beyond simple debt, like a lawsuit that alleges you committed fraud or caused a wreck while driving drunk.

Family Court Matters

Although it is not strictly required by bankruptcy law, many family law courts will stop a divorce or child custody proceeding until one of the parties gets a "comfort order" from the bankruptcy judge, ruling that it's safe to proceed in family court. The family court judge wants the comfort order to ensure that the parties are not subverting federal law. If the family court is deciding issues like whether a couple should divorce or who takes custody of the children, a bankruptcy court is unlikely to see any overlapping interests.

Other family court matters that can proceed include actions or lawsuits to:

  • Set, modify, or collect child support and alimony after the bankruptcy case is filed
  • Determine visitation rights
  • Protect a spouse or child from domestic violence
  • Intercept tax refunds to pay past-due child support
  • Suspend or restrict drivers' or professional licenses due to past-due child support

If the family court lawsuit will include a property settlement, almost every bankruptcy court will require that the terms of the settlement be rubber-stamped by the bankruptcy court before it can become final in the state court. This is because bankruptcy jurisdiction covers virtually all of the debtor's property, which cannot be transferred away without court permission.

Criminal Court Matters

Sometimes, a criminal proceeding involves both a criminal component and a financial component. For instance, a bad check charge could result in punishment for breaking the law and an order to make good on the check. If the criminal proceeding can be separated, the bankruptcy court will likely allow the criminal action to continue without requiring that the prosecutor file a motion for relief from the automatic stay.

As to the financial component, the automatic stay applies. The prosecutor or the check's recipient would have to file a motion to continue or commence an action in a state court on the check. More likely, however, the creditor would bring a lawsuit within the bankruptcy itself (called an adversary proceeding) to determine if the debt that resulted from the bad check was dischargeable in the bankruptcy. 

Court fines, penalties, and criminal restitution are also not dischargeable in a bankruptcy case. Some bankruptcy courts take the position that authorities should file a motion to lift the stay in the bankruptcy court before they impose these, but other courts will allow the actions to proceed without having the automatic stay lifted.

Personal Injury Claims

Certain personal injury claims are not dischargeable in bankruptcy. The Bankruptcy Code specifically addresses debts that stem from intoxicated driving, and the automatic stay will not protect you from these debts. Debts caused by willful and malicious injury to another or to the property of another are also not discharged. In general, bankruptcy courts will allow state court lawsuits to proceed—after the parties file a motion for relief from stay—if the lawsuit could result in a decision that the debt would not be dischargeable in bankruptcy.

Closely related cases could address whether the debtor committed fraud to obtain money. If a lawsuit with a fraud component is pending when a bankruptcy is filed, the bankruptcy court may well allow that lawsuit to continue, but this would also require a motion for relief from stay.

Insurance Claims and Proceeds

If you are being sued or have a claim filed against you for a car accident or personal injury case, the plaintiff may have to seek permission from the bankruptcy court to pursue the insurance claim. Most bankruptcy courts will allow these types of cases to go forward, so long as the creditor agrees to limit its recovery to the amount it can get from the insurance policy.