Being Sued By a Creditor While in Bankruptcy

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Oh no! You've been served! For most individuals who file a Chapter 7 or a Chapter 13 bankruptcy case, the process is smooth and straightforward. Although it may be emotionally difficult for you to file for bankruptcy, it is very likely that you will emerge in one piece! Unfortunately, sometimes a creditor will decide that it needs to sue the debtor (the person who files bankruptcy) in the bankruptcy court.

Sometimes the creditor files a lawsuit in another court because it just doesn't understand how bankruptcy works. Sometimes the creditor knows full well how the bankruptcy works and is asking the court to declare the debt nondischargeable. This is usually to ask the court to declare that the creditor's debt is not discharged by the case.

When you're sued in bankruptcy, the matter is called an "adversary proceeding." As it sounds, the proceeding is adversarial, just like any lawsuit. It will have a plaintiff and a defendant. Although most of the time you as the debtor will be the defendant, that is not always the case. Many debtors will file adversary proceedings to ask the court to declare a debt dischargeable. For instance, you might ask the court to discharge your student loan. 

When You're Sued Outside of Bankruptcy Court

Most people who file bankruptcy already have a lawyer. If you do not yet have a lawyer, for instance, if you filed the bankruptcy case pro se, at this point you will definitely need one. It is almost impossible to defend a discharge lawsuit in bankruptcy court on your own. Chances are when you're sued in another court, like a state court, while you're in bankruptcy either

  • your creditor is unaware of the bankruptcy
  • your creditor doesn't understand the automatic stay

The automatic stay is designed to prevent creditors from taking collection actions outside the bankruptcy court. Most outside lawsuits are prohibited unless they're filed with permission of the court.

If the creditor is unaware of the bankruptcy, usually it just takes a phone call or notice to the attorney filing the other case and ensuring that the creditor is listed in the bankruptcy case. The creditor should withdraw the other case. 

Some matters are not appropriate for bankruptcy court, like divorce proceedings. Many times, the attorney for the other party will come first to bankruptcy court to get permission to file the state court case. On occasion, the creditor will file a lawsuit in state court on a debt. If the suit is just seeking a money judgment, the bankruptcy court will likely shut it down.

If the suit is attempting to fix liability that could eventually lead to a finding that the debt is not dischargeable, the court could decide to leave the suit where it is, move it to the bankruptcy court, or have it dismissed and refiled in the bankruptcy court.

For instance, this might happen when the debtor is accused of fraud. Fraud could render a debt nondischargeable, but the debtor has to be found to have committed fraud first. That could be accomplished in the state court or the bankruptcy court. 

When You're Sued in Bankruptcy Court

Chances are if you're being sued in bankruptcy court, it has to do with the nature of the debt and whether it's going to be dischargeable

If you are sued in bankruptcy court, you will have to be served with a document called the "complaint." A complaint is merely a written document that explains why the person suing you is entitled to relief from the bankruptcy court.

Under the Federal Rules of Bankruptcy Procedure, you can be served with the complaint by having it mailed to the address on your bankruptcy petition (so be sure to read your mail).

You will also have to be served with a summons and sometimes other documents. The summons indicates how soon you must respond to the complaint and whether you have to make any court appearances.

Reasons for the Lawsuit

There are many reasons you may have been sued in bankruptcy court. Sometimes the lawsuit can be very complex: other times it can be straightforward. Some of the most common lawsuits are when your creditors sue you under the federal statutes 11 U.S.C. section 523 and 11 U.S.C. section 727. In common terms, these sections are called a dischargeability lawsuit and a denial of discharge lawsuit.

Basically, the first lawsuit is asking the bankruptcy court to prevent the debt that you owe to a particular creditor from being discharged in bankruptcy. The other lawsuit seeks to prevent you from getting any bankruptcy discharge (this is very bad!). You could also be sued by the bankruptcy trustee for various reasons, such as a fraudulent conveyance

What to Do About the Lawsuit

The first thing you should NOT do is panic. Remember that anyone can sue anyone as long as they can pay the clerk's filing fee. Just because you have been sued does not mean you have done anything wrong. However, you must comply with the court's procedure.

This involves responding to the complaint. Generally, there are two ways to respond to a complaint: filing an Answer or filing a Motion to Dismiss. Most individuals without attorneys will want to file an Answer, as a Motion to Dismiss can be complicated and requires an understanding of the law.

Many bankruptcy courts will have forms for debtors that represent themselves (often called "pro se" debtors) to Answer complaints. These forms will usually be check-the-box style and allow you to generally deny all of the allegations of the complaint. However, I strongly recommend that you still see an attorney.

What Is Next

Usually, after filing your Answer, the next step is to appear in court for a status conference. These conferences are often brief in duration and involve the judge getting a very general understanding of the case. The judge may also set certain deadlines and future hearing dates. If you do not have an attorney at this stage, you should strongly consider getting one.

Edited October 2017 by Carron Nicks