When you’re already dealing with overwhelming debt, the situation can become even more stressful if you’re faced with a lawsuit from creditors. Whether it’s from credit card debt, medical bills, or personal loans, a lawsuit can escalate your financial woes and add another layer of complexity to your life. However, bankruptcy can serve as a powerful tool to help protect your assets, stop creditor actions, and give you a fresh start. This blog post will explain what you should do if you’re facing bankruptcy and a lawsuit, including how bankruptcy can protect your assets and what steps to take to safeguard your financial future.

Understanding the Intersection of Bankruptcy and Lawsuits

How Lawsuits Impact Your Finances

If a creditor files a lawsuit against you, it can lead to a court judgment, and potentially, wage garnishment, bank levies, or even liens on your property. These actions can severely disrupt your financial stability, especially if you’re already struggling with debt. A lawsuit can also result in a creditor seizing assets that you rely on to maintain your livelihood, such as your vehicle, home, or other essential possessions.

How Bankruptcy Can Help

When you file for bankruptcy, one of the most powerful benefits is the automatic stay. The automatic stay is an order from the bankruptcy court that halts most creditor actions, including lawsuits, garnishments, and foreclosures. Once you file for bankruptcy, this stay goes into effect immediately, providing you with relief from creditor harassment and legal actions. This means that your creditors must cease any collection efforts until your bankruptcy case is resolved.

For many individuals facing both bankruptcy and lawsuits, the automatic stay offers immediate protection, giving you time to reorganize your financial affairs and plan a way forward.

Bankruptcy and Lawsuits: Chapter 7 vs. Chapter 13

1. Chapter 7 Bankruptcy and Lawsuits

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is typically the quickest form of bankruptcy. In Chapter 7, most of your unsecured debts—such as credit cards, medical bills, and personal loans—can be discharged, freeing you from the financial obligations that led to the lawsuit in the first place.

The bankruptcy process will involve the liquidation of non-exempt assets to repay creditors. However, in most cases, individuals can exempt a significant portion of their property and keep their essential assets, including a car or home, depending on your state’s exemption laws.

Stopping the Lawsuit: If you’re facing a lawsuit for unsecured debt, Chapter 7 can discharge those debts, and the lawsuit will be effectively resolved once the bankruptcy is completed.

Impact on Assets: If your assets are not exempt, they may be liquidated to repay creditors. However, the automatic stay will protect you from further legal actions until your case is resolved.

2. Chapter 13 Bankruptcy and Lawsuits

Chapter 13 bankruptcy is a reorganization bankruptcy that allows you to keep your assets while reorganizing your debts into a manageable repayment plan. Unlike Chapter 7, you do not need to liquidate your assets in Chapter 13 bankruptcy. Instead, you will agree to pay your creditors a portion of your income over a three-to-five-year period.

Stopping the Lawsuit: In Chapter 13, the automatic stay also stops lawsuits from proceeding, and any judgments related to the lawsuit may be included in the repayment plan. This means you can repay the debt in installments, making it easier to manage.

Keeping Your Property: One of the major benefits of Chapter 13 is that it allows you to protect your property, including your home and car, while paying off your debts under a structured repayment plan. If you have been sued and have assets at risk, Chapter 13 may allow you to keep them.

Protecting Your Assets During Bankruptcy

While bankruptcy can offer relief from lawsuits and debt, it’s important to take steps to protect your assets throughout the process:

1. Understand Exemptions

Each state has specific bankruptcy exemptions that allow you to protect certain assets from being sold to pay creditors. In California, for example, exemptions can cover personal property like vehicles, household items, and a portion of your home’s equity. Working with a bankruptcy attorney can help you understand what assets are exempt in your case and how to protect them.

2. Be Honest with Your Attorney

To effectively protect your assets, you must be honest and transparent with your bankruptcy attorney. Failing to disclose assets or income can result in serious consequences, including the dismissal of your bankruptcy case or criminal charges for bankruptcy fraud. Make sure to provide all relevant financial information so your attorney can guide you through the process effectively.

3. Act Quickly

If you’re facing a lawsuit and considering bankruptcy, it’s important to act quickly. Filing for bankruptcy before a judgment is issued can help prevent wage garnishments or liens from being placed on your property. The earlier you file, the sooner the automatic stay will protect you from further creditor actions.

Take Action and Protect Your Future

Facing a lawsuit while considering bankruptcy can be overwhelming, but you don’t have to navigate it alone. Bankruptcy provides a powerful tool for stopping lawsuits, discharging debt, and protecting your assets. Whether you’re considering Chapter 7 or Chapter 13 bankruptcy, understanding how these options can help you manage the impact of lawsuits is essential.

If you’re facing a lawsuit or dealing with overwhelming debt, contact our experienced bankruptcy attorneys today. We can guide you through the process and help you explore your options for protecting your assets and securing a fresh financial start.

Facing a lawsuit and considering bankruptcy? Contact our experienced bankruptcy attorneys at Winterbotham Parham Teeple, a PC today by calling 800.400.9000 and take control of your financial future!