What Are Your Options if You Are Being Sued By a Creditor While in Chapter 7 or Chapter 13 Bankruptcy?

September 15, 2022

Creditors sometimes file lawsuits against borrowers who are unable to repay their debts on time. When this happens, creditors seek relief in civil court, which will come in the form of a judgment.

Many people who have judgments entered against them wonder what happens if a creditor sues them while they are in the process of filing Chapter 7 or Chapter 13 bankruptcy.

The quick answer is that bankruptcy may completely eliminate civil lawsuits and any judgments. However, some lawsuits and judgments will have to be repaid.

This can be a complicated situation, depending on the type of debt and the type of bankruptcy you are filing. Let's take a more in-depth look at your options if you are being sued by a creditor while in Chapter 7 or Chapter 13 bankruptcy.

What happens after a Judgment is entered against you?

A judgment is a generic term to describe an order that a civil court issues in a matter. When you take out a loan or borrow money of any kind, you are taking on the legal obligation to repay that debt. These debts can include credit cards, personal loans, and lines of credit.

Service providers such as medical offices, cell phone companies and utility companies are also allowed to seek legal relief for outstanding debt you haven't paid. 

If the providers have been unable to collect on the outstanding payments, they may sue you to receive relief. During the hearing, a court will enter a judgment against you if either you don't show up for the hearing or if the judge rules in the creditor's favor.

Creditors will use judgments to try to collect outstanding money. This can be done by initiating a property attachment, property lien, or by garnishing your wages. The court will determine how much the creditor can garnish, and that varies from state to state.

Will a lawsuit affect my bankruptcy?    

Lawsuits are sometimes immediately stopped by the act of filing bankruptcy. A civil lawsuit seeking to collect money from you will often halt once you file bankruptcy.

Through what's known as an automatic stay, creditors will be prevented from taking any further collection activity. This includes pursuing a new judgment against you or trying to collect on a judgment that has already been issued. 

Are Judgements discharged in a bankruptcy?    

The automatic stay will stop most judgments from being issued. This includes judgments issued for outstanding credit card balances, compensation you owe for your role in a personal injury incident, as well as some evictions.

If a judgment has already been entered and action is being taken to collect on the debt -- such as garnishing your wages -- that action will stop once bankruptcy has been filed.

The question, though, is will the judgment be discharged once the bankruptcy is approved? If the debt would normally qualify for a discharge through bankruptcy, then it will be discharged as normal, even if a judgment is in place. This is one of the biggest benefits of bankruptcy.

There are some judgments that can't be discharged, though. These include student loans, criminal penalties including restitution and fines, domestic cases such as alimony and child support, and some taxes.

Do creditors get paid in Chapter 7?

Chapter 7 bankruptcy provides the most benefits to applicants and doesn't usually provide much compensation to most creditors. Chapter 7 often allows applicants to keep assets such as their homes and cars even after the bankruptcy is approved.

There are some instances, though, in which some assets and non-exempt property must be sold off. Creditors will then be paid from whatever proceeds come from that sale, in a priority order.

If there are no non-exempt assets, then creditors won't get paid once debts are discharged through Chapter 7.

Can a creditor collect on a discharged debt?

Once a bankruptcy case has concluded and your debts have been discharged, creditors are no longer allowed to collect on that outstanding debt. That is the point of bankruptcy. Those debts that are discharged basically no longer exist.

It's important to work with your bankruptcy lawyer so you can understand exactly what debts have been discharged through the case and which ones you will still be responsible for paying. This will also help you deal with any creditors who attempt to collect on a debt after the bankruptcy judge issues the discharge order.

Who is the plaintiff in an adversary proceeding?

The creditors will be considered the plaintiffs in a bankruptcy adversary proceeding. This is because they are the ones who are seeking for the court to award them money in the case. The person who files the bankruptcy will be considered the defendant, since it's their actions that caused the case in the first place.

Which is worse: bankruptcy or judgement?

Judgments can have serious long-term ramifications. Once they are entered in a court, creditors have legal tools available to them so they can try to collect the outstanding money you owe them. 

Some of the more serious tools are the ability to garnish wages or even put a lien on your property. Both of those options could seriously impair your ability to pay other outstanding debts or reduce the amount you could earn from your property if you were to sell it because your paycheck would be less than it normally is.

While there are consequences bankruptcy, such as a hit to your credit score, the ability to discharge debts is the major upside. It is often difficult to set aside a judgment. Bankruptcy provides a way of escaping such a judgment.

Many people try to avoid filing for bankruptcy. However, having the debt actually discharged is often preferable to being forced to pay it through wage garnishment or a property lien. 

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