If you are facing a lawsuit to collect a debt and may lose before trial because of summary judgment, filing for bankruptcy might offer some protection. Because a lawsuit filed against you is considered a debt, it might be dismissed with most of your other debts through the Chapter 7 bankruptcy process if you have few assets or income.
Upon the filing of a petition for bankruptcy, you are entitled to immediate protection from all debt collection actions due to the automatic stay granted under federal bankruptcy law. Once the bankruptcy is filed, the clerk of the bankruptcy court issues a notice to all of the creditors listed on your petition, which should include the creditors who filed the lawsuits against you. You should also provide notice to the court in which the summary judgment motion is pending to stop all processing of that case.
Lifting the Stay
There is a legal procedure your creditors may exercise to ask the bankruptcy court to lift the automatic stay that is blocking the civil litigation against you. The creditor must file a motion with the judge explaining why the court should apply a legal exception that exempts its lawsuit from the automatic stay. There are a few arguments the creditor can make. The creditor could provide evidence and argue that you have more assets than debts and your bankruptcy petition is a scheme to fraudulently avoid liability in its lawsuit. The creditor could argue you have no equity in the property that is the subject of the lawsuit and that it would be harmed if it did not recover the contested property. The creditor can move to have the stay lifted by showing you have an insurance policy that fully covers any payment that you would otherwise owe.
Automatic stay protection under Chapter 7 bankruptcy does not stop the issuance of a decision on summary judgment for every type case. For example, bankruptcy protection does not extend to child support or divorce proceedings, criminal cases or tax audits. The automatic stay also does not protect against lawsuits filed to recover debts that were incurred after you filed for bankruptcy.
The automatic stay may not impede the issuance of summary judgment on a case if the lawsuit you are involved in has multiple defendants. Although the stay is applied to you as a defendant in the litigation, the case will likely proceed against other co-defendants if they have not also filed for bankruptcy. In some circumstances a court may still be able to issue a decision on the merits of the case, but withhold issuing a final judgment against you because of the bankruptcy.
References & Resources
- Cornell University Law School: Summary Judgment
- United States Courts: Chapter 7
- Los Angeles County Bar Association: The Impact of an Adversary Filing for Bankruptcy during Civil Litigation
- Seltzer Caplan McMahon Vitek: Automatic Stay Litigation
- Cokinos Bosien & Young: Scope of the Automatic Stay in Suspending Multi-Party Litigation
- Cornell University Law School: 11 USC § 362 - Automatic stay
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