I’m suing someone and they filed for bankruptcy. What happens next?

As we have discussed in previous posts, immediately upon filing a voluntary Petition for Bankruptcy, the protections of the Automatic Stay go into effect to protect the debtor in an active bankruptcy. 11 U.S.C. §362(a) provides that the commencement or continuation of any acts or proceedings against the debtor in an effort to collect or recover any debt is automatically stayed, and any further efforts at collection are prohibited and punishable by law. Pursuant to 11 U.S.C. §362(k), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

Therefore, if you are the plaintiff in a civil lawsuit against a debtor in bankruptcy, it is imperative that you immediately cease collection efforts against the debtor, including ensuring the court takes no further action with respect to the case. Debtor’s counsel should file a “Suggestion of Bankruptcy” with the court, which is a notice to the Court that a party to the case is in bankruptcy, and the case may not proceed with respect to them or any claims against them. If the Debtor’s counsel does not file a suggestion of bankruptcy, in order to avoid the penalties of 11 U.S.C. §362(k), you or your attorney should ensure the court is aware that a party to the case has filed for bankruptcy. The Court Clerk or your civil attorney will advise you on the proper way to file such a notice.

Once the case has been stayed (i.e., paused), you must decide if you have grounds to pursue your claims in bankruptcy court, or have a reason why the particular debt is nondischargable by law in bankruptcy. For example, debts which were obtained by false pretenses, or false representations, or actual fraud are not dischargeable, nor are debts owed for fraud or defalcation while acting in a fiduciary capacity, or embezzlement or larceny, among other things. Each of these categories have particular legal requirements in order to prove nondischargability, and in order to prevent the discharge of that debt, you will need to prepare and file an Adversary Proceeding in the Bankruptcy Court.

Procedurally, an Adversary Proceeding is conducted much like a lawsuit in District Court or Superior Court, although the Bankruptcy Court maintains jurisdiction over the resolution of the claims. Removing a case to bankruptcy court can have far-reaching consequences on other aspects of the litigation, and we strongly recommend you consult with an attorney before doing so.

In some situations where your debt is secured or enjoys a legal priority over other debts, and there are assets available in the bankruptcy to pay creditors, it may not be necessary to file an adversarial proceeding, but rather a Proof of Claim. A Proof of Claim is your notice to the court establishing the existence of a debt and the nature of the debt, and will be reviewed by the Trustee and the debtor’s counsel. If funds are available to satisfy your class of debt, you may receive payment (partial or full, depending on the assets obtained from the debtor) from the bankruptcy trustee on behalf of the debtor’s bankruptcy estate.

Regardless, if you are involved in litigation and the opposing party files for bankruptcy, contact Attorney Matthew P. Trask to discuss how the bankruptcy will affect your case and claims moving forward. To fail to assert your rights in the bankruptcy case so could be an extremely costly mistake.