Removing Bankruptcy's Automatic Stay: Lawsuits and Insurance Claims

••• Getty Images

The 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 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 and court proceeding that is pending when you file bankruptcy will come to a stop, 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 Credit Card, Personal Loans, Secured Loans and other Types of Debt

If it's just a lawsuit over a debt that will be discharged in bankruptcy, the court will not grant permission to proceed. There would be no point if the debt will be discharged in the bankruptcy case. But, if the lawsuit could potentially lead to a determination that the debt is one that will not be discharged, the bankruptcy court will either let the civil lawsuit continue or the parties will move the lawsuit into the bankruptcy court. This might include a lawsuit that alleges you committed fraud or a lawsuit that might determine whether your drunk driving caused a wreck.

Family Court Matters

Although it is not strictly required under the Bankruptcy Code, many family law courts will stop a divorce or child custody proceeding until one of the parties gets a "comfort order," a ruling from the bankruptcy judge 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. The Bankruptcy Code specifically allows those types of family court cases to proceed despite the bankruptcy because it has little or no interest in whether the parties divorce or who takes custody of the children.

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.  

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 child custody and visitation
  • 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

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 in order to make good on the check. If the criminal proceeding can be separated out, the Bankruptcy Code will 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, and the prosecutor or the check's payee 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 even dischargeable in the bankruptcy

Court fines and 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 arise when a person operates a motor vehicle while intoxicated. 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 are cases that 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 it will be necessary for the parties to file a motion for relief from stay before that can happen.  

Insurance Claims and Proceeds

If you are being sued or otherwise have a claim filed against you for a car accident or other 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 if the creditor agrees to limit its recovery to the amount it can get from the insurance policy.