For most people 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, sometimes it's the only option. Unfortunately, sometimes a creditor may still try to sue you after you've filed bankruptcy. If that happens, there are a few things you should know.
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. Sometimes a debtor will file adversary proceedings to ask the court to declare a debt dischargeable, which means able to be wiped out. For instance, you might file to ask the court to discharge your student loan.
As soon as you file bankruptcy, an automatic stay goes into effect. The automatic stay is designed to prevent creditors from taking collection actions outside the bankruptcy court. Under an automatic stay, most outside lawsuits are prohibited unless they're filed with permission of the court.
Some instances where you can still be sued, despite the automatic stay:
- Child custody
- Criminal cases
These lawsuits, if filed, are allowed because they don't directly involve debts.
Suing or Being Sued After Filing Bankruptcy
Chances are when you're sued in another court, such as a state court, while you're in bankruptcy, it's because of one of the following:
- your creditor is unaware of the bankruptcy
- your creditor doesn't understand the automatic stay
If the creditor is unaware of the bankruptcy, usually it just takes a phone call or notices to the attorney filing their case to ensure the creditor stops trying to collect on the debt. If they don't, you can notify the bankruptcy court.
Many times, the attorney for the other party will come first to the bankruptcy court to get permission to file a 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 a 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 in a dischargeability lawsuit or a denial of a discharge lawsuit.
A dischargeability suit is asking the bankruptcy court to prevent the debt that you owe to a particular creditor from being discharged in bankruptcy. Denial of discharge lawsuit seeks to prevent you from getting any bankruptcy discharge. You could also be sued by the bankruptcy trustee for various reasons, such as fraud.
Most people who file bankruptcy already have a lawyer. If you don't—for instance, if you filed the bankruptcy case pro se, or representing yourself—at this point you will definitely need one. It is almost impossible to defend a discharge lawsuit in bankruptcy court on your own.
What to Do About the Lawsuit
First, don't panic. Remember that anyone can sue anyone as long as they 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 who represent themselves 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, you should still consult 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 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 yet have an attorney at this stage, you should strongly consider getting one.
Updated by Carron Nicks