Can I Still Collect on a Lawsuit if the Defendant Filed Bankruptcy?

Most lawsuits are complex and involve a great investment of time and resources to see through to completion. One of the most complex scenarios is deciding whether it is possible to file a lawsuit against an entity or individual that files for bankruptcy protection, or whether it is possible to continue to pursue an existing lawsuit.

The answer to that question varies, but it helps to first understand the processes involved in a bankruptcy proceeding.

For answer to specific bankruptcy litigation questions, please contact the Business Trial Group.

Automatic Stay

Regardless of the status of a business litigation case, any defendant who files a bankruptcy is granted an automatic stay upon filing. During an automatic stay, any lawsuit, foreclosure, garnishments and/or collection efforts are halted.

“The automatic stay is the single greatest protection mechanism for a debtor, but is not without limits.”

There are a few actions not stopped by an automatic stay, including divorce and child support proceedings, and tax and pension loan proceedings. It is possible, however, to have the stay lifted to continue the prosecution of your claim, if certain requirements under the Bankruptcy Code are met.

It is important for a creditor to understand the nature of the automatic stay’s role in the pursuit of a claim, as there are severe sanctions available to a debtor, including monetary relief, for violation of the automatic stay.

“The automatic stay is the single greatest protection mechanism for a debtor, but is not without limits,” says BTG attorney Christian Savio.

Restoring your Ability to Collect

Attempting to collect or pursue a lawsuit against a debtor who has received a stay can result in fees for the violation of the stay, including actual and punitive damages. Thus, if you wish to continue to pursue collections against the recipient of a stay, you must seek and receive stay relief from the Bankruptcy Court.

Filing a motion for relief from automatic stay requires a written statement to be delivered to the bankruptcy court requesting such relief. This must include an explanation of the legal basis behind the request, along with documentation that supports the claims. Other necessary items for filing for relief include a small filing fee.

Note that if a court discharges all debts owed by a debtor, the debtor is considered under permanent stay, and collection on those particular debts may no longer be pursued.

Related Reading: What are adversary proceedings in a bankruptcy case?

Do I Need to File a Proof of Claim?

All creditors who are pursuing collections from a debtor filing for bankruptcy should, and in most circumstances must, file a proof of claim. A standard form is used to file a proof of claim, which includes providing such basic pertinent information as the amount of the debt and whether such debt is secured or unsecured.

If you are a secured creditor, within the bankruptcy case you will be automatically considered as an entity that is owed a debt by the filer, as long as the debt is listed on the debtor’s schedules.

Generally, if you own a lien on specific real or personal property of the debtor, you are considered a secured creditor under the Bankruptcy Code. As a secured creditor, you have a right to receive adequate protection payments while the debtor attempts to reorganize its debts.

Bankruptcy Litigation Without Up Front Legal Fees

Understanding your relationship with the debtor will go a long way toward making the pursuit of outstanding debt a smooth process. It is important to consult an attorney about your rights once a defendant has filed a bankruptcy petition.

Our experienced business attorneys handle bankruptcy litigation on a contingency-fee basis, so you will not pay any legal fees unless we successfully obtain a recovery in your case.

If you are unsure whether you should pursue a debtor or are unclear on what your next steps should be, we can review your case free of charge.