Getting sued often produces panic, then the sense that you need to file bankruptcy right now.
Does it really mean you have to file bankruptcy?
Since the legal theories behind lawsuits can vary widely, there are no universal answers to the question.
Complaints can range from the simple collection action to a complex business tort case.
But most likely, you don’t have to file bankruptcy immediately, this week or even this month. You may want to file an answer to the suit, however.
Should I answer the complaint?
The law presumes that if you don’t answer the complaint, you agree with the contention of the lawsuit.
Consider answering the lawsuit if 1) you have a defense; or 2) you want to buy time to consider your options.
Californians can find information about representing themselves in state law matters (not bankruptcy) from the court’s legal self help site.
What happens if I do nothing?
If you do not file an answer, the plaintiff (the entity that brought the suit) can ask the court for entry of a judgment in the amount stated in the complaint.
If no amount is stated for damages in the complaint, the plaintiff has to put on proof of the amount of damages. Generally, unless you answered the complaint, you cannot participate in the hearing to set the damages.
Once a judgment is entered, the plaintiff can obtain a lien on your assets and can use the services of the sheriff to levy on your bank accounts and garnish your wages (if permitted in your state).
If all of your assets and income are exempt under the law of your state, and you expect that situation to continue well into the future, you may be able to ignore the suit altogether.
Even after a creditor gets a judgment, you can negotiate with the creditor for the payment of the judgment. Since the creditor incurs expenses and delay in using legal processes to collect a judgment, you can sometimes negotiate a discount on the judgment for voluntary payment.
Do I have to file bankruptcy before there’s a judgment?
First, remember that it takes weeks or even months from service of the actual lawsuit until the creditor actually has a judgment on which he can execute.
There are time periods prescribed in the law of each state which create the absolute minimum time periods required. In the real world, most institutional creditors, like credit card companies, don’t move these suits forward with much urgency.
In general a debt represented by a judgment is just as dischargeable as the same debt prior to entry of judgment. Note, however:
- A judgment lien that attaches to assets is only avoidable by the debtor if it impairs an exemption. More about exemptions.
- If the complaint alleged fraud or other grounds that would make a debt non dischargeable in bankruptcy, entry of a judgment against you may prevent you from later contesting the facts (i.e. you may be unable to get a bankruptcy court to hear your side of the fraud charge in a non dischargeability action).
- In the case of debts that are unliquidated (uncertain in amount), a judgment will liquidate the debt: that may have the effect of increasing your debts beyond the eligibility requirements of Chapter 13, with its expanded discharge and inexpensive reorganization possibilities.
Yes, a bankruptcy filing will terminate garnishments as to wages earned after the filing of the bankruptcy.
Wages earned before the filing may be recoverable from the sheriff or the creditor if those wages would otherwise have been exempt.
The only possible exception concerns family support collections. More on the automatic stay.
Is bankruptcy the solution?
The decision to file bankruptcy should not, in general, be driven by a single debt.
Consider your total financial picture, the scope of relief that bankruptcy offers, and the non bankruptcy alternatives.
But often, filing of a collection action reinforces the idea that you need to do something to regain control of your financial future.