How bankruptcy can protect those sued by their creditors

On Behalf of | Jun 7, 2024 | Bankruptcy

Businesses owed money by individuals are often very assertive about collecting on those debts. Collection professionals can call people so frequently that it feels like harassment. They send strongly-worded letters meant to intimidate people into paying.

Those struggling to fulfill their financial obligations often find those collection efforts to be relatively stressful. Sometimes, creditors who do not receive repayment as quickly as they would like decide to take the matter to court. A creditor lawsuit can lead to wage garnishment or even a lien against personal property. Businesses often prevail in such lawsuits.

Those served with creditor lawsuit documents often decide to file bankruptcy in response. How can bankruptcy benefit those facing a collections-related creditor lawsuit?

Bankruptcy halts all collection activity

Many debts are theoretically eligible for discharge in a successful bankruptcy filing. Filers report their debts to the courts, along with the relevant paperwork based on the type of bankruptcy they file. Some may proceed quickly toward a discharge, while others may need to make a few years of payments before they can discharge their remaining debts.

Until the courts have a chance to hear the case, the filer is effectively in legal and financial limbo. The courts assist during that time by extending an automatic stay. The same day that someone files their initial bankruptcy paperwork, collection activity temporarily ends. Many creditors receive direct notice from the credit bureaus about a recent bankruptcy filing. If they still make collection attempts, the filer can notify them of the pending bankruptcy case to halt future communications.

Typically, creditors pursuing lawsuits against filers have to dismiss their lawsuits until the courts resolve the case. If the debt is eligible for discharge, the filer may never have to worry about any additional collection activity related to that obligation. Even if the debt in question isn’t eligible for discharge, the filer may be able to negotiate payment arrangements as part of their bankruptcy. The discharge of other debts could allow them to better manage their obligations in the future.

Receiving notice of a creditor lawsuit often leads people to question whether or not they may need to file for personal bankruptcy. Bankruptcy can be useful for many people struggling with financial issues, including those facing creditor lawsuits.