Removing Bankruptcy's Automatic Stay: Lawsuits and Insurance Claims

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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.

Read more about it at: The Automatic Stay: How It Protects You When You File Bankruptcy

If a creditor is in the process of suing you or bringing another type of court case against you at the time you filed bankruptcy, the proceeding would have to come to a stop.

Depending on the type of lawsuit, the creditor could ask the bankruptcy court for permission to continue the suit. Some lawsuits will be allowed to continue, but others will not. 

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. 

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 permission from the bankruptcy court to proceed.

The Bankruptcy Code specifically allows those types of cases to proceed despite the bankruptcy. If, however, the family court lawsuit will include a property settlement, almost every bankruptcy court will require that the terms of the settlement be approved 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 

  • to set, modify or collect child support and alimony after the bankruptcy case is filed
  • to 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 (breaking the law) 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 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 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 debts that 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 caused when injury occurs 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 debtor has caused an injury that would not be dischargeable in bankruptcy.

Closely related to these types are cases are ones 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.  

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 an 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. 

 

To understand how the automatic stay can affect evictions, read:

Removing Bankruptcy's Automatic Stay: Utilities and Rent

Learn more about how the automatic stay works in bankruptcy: 

The Automatic Stay: How It Protects You When You File Bankruptcy

Removing Bankruptcy's Automatic Stay: Introduction

Removing Bankruptcy's Automatic Stay: Past Due Car and House Payments 

Your Rights When a Creditor Violates the Automatic Stay