What if I File an Emergency Chapter 7 in Lieu of a Lawsuit?

by Beverly Bird
An automatic stay prevents most lawsuits against you from proceeding.

An automatic stay prevents most lawsuits against you from proceeding.

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Although there is technically no such thing as an "emergency" Chapter 7, filing for bankruptcy protection can feel a little like having a masked hero fly to your side to rescue you from a difficult situation. The bankruptcy system is designed to save those who cannot pay their debts from serious repercussions.

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Creditor Lawsuits

If you receive notice that a creditor is taking you to court for an unpaid debt, the creditor is probably not going to be able to get a judgment against you the next day. Although state laws can differ in their finer points, creditors must follow a similar procedure no matter where you live. They must first file a collection lawsuit against you. They must then hire an attorney to appear in court and present the case to the judge. Assuming the lawsuit is successful, the judge will award the creditor a judgment, but this judgment is powerless by itself. Other than appearing on your credit record, it cannot hurt you unless your creditor returns to court for permission to execute it. It can then garnish your wages or take other collection efforts. This entire process can take some time, so you should have ample opportunity to stop it in its tracks by filing for bankruptcy protection.

Chapter 7 Basics

As an individual debtor, you have a few options for bankruptcy protection. The most common are Chapter 7 and Chapter 13. After you file for Chapter 7, the trustee takes control of your bankruptcy estate. This is everything you own or have an interest in. You can make use of exemptions, however – federal or state lists of property that you can remove from the proceedings. This property is safe, but your trustee will liquidate or sell everything else and apportion the proceeds among your creditors. If there is not enough money to go around to all of them, the court discharges or erases the balance of your obligations

Automatic Stay

In most cases, the effect of your bankruptcy on pending lawsuits is automatic. If a creditor has filed a lawsuit against you, it cannot send a lawyer to court to prosecute the case. If it has gotten a judgment, it cannot go back to court to activate the judgment to use it against you. If it has already received court permission to execute the judgment, the law prevents it from doing so. This "automatic stay" acts like an emergency measure to protect you against any pending or potential lawsuits.

Adversary Proceedings

Under some circumstances, your creditor can file an adversary proceeding asking the court to lift the automatic stay so it can proceed with collection efforts. It needs cause, however – a statutory, acceptable reason why the stay puts the creditor at an unfair disadvantage. For example, if you have a secured debt such as your mortgage or auto loan and you are far behind with your payments, your creditor might file a motion for relief from the stay so it can repossess the vehicle or foreclose on your property. This is reasonable because your home or your automobile act as collateral to secure these loans. The stay would be unfair to the lender if it prevents it from both collecting your past due payments and reclaiming the property. Unsecured creditors such as credit card companies usually have a greater burden to convince the court to lift the stay and allow them to proceed with collections.

Other Exceptions

Normally, the stay remains in effect until your bankruptcy case concludes and your debts are discharged, but this is not always the case. If you filed for bankruptcy before but did not receive a discharge, the stay might be granted for only a limited period of time. You always have the option of defending against lawsuits in civil court rather than filing for bankruptcy, but this might not be a quick fix or offer you much hope for success.