How Bankruptcy Affects Lawsuits
Bankruptcy can have an impact on many aspects of a debtor’s life. Indeed, bankruptcy can influence a debtor’s credit, and can impact whether a person is able to secure a loan. In addition, bankruptcy filings are public records, and bankruptcies can follow an individual around for years to come. There are also a variety of ways how bankruptcy affects lawsuits.
Lawsuits Put on Hold
One of the main ways how bankruptcy affects lawsuits is since bankruptcy will typically put certain types of legal cases on hold. For instance, any type of debt collection litigation will typically be stayed until a bankruptcy matter has been decided. This is because bankruptcy judges do not want one creditor to unfairly obtain a disproportionate share of a debtor’s assets. Normally, creditors need to go through the bankruptcy process, and not separate litigation, in order to recover money from a debtor after a bankrupt petition has been filed.
It should be mentioned that parties can also ask bankruptcy courts for permission to continue a lawsuit against a bankrupt individual or company under certain circumstances. Generally, if a creditor will be harmed if a lawsuit is put on hold because of a bankruptcy filing, they will usually be allowed to go ahead with the lawsuit. In any case, one major way how bankruptcy affects lawsuits is that it can suspend activity involving certain types of cases.
Settlement Issues
Another way how bankruptcy affects lawsuits is when it comes to settlements. The vast majority of cases settle before they are ever heard by a jury. However, bankruptcy trustees are allowed to recover money paid to one creditor within a short time period before a bankruptcy petition is filed. Plaintiffs who file lawsuits against bankrupt debtors are considered creditors, and they are oftentimes subject to this rule. The reason why trustees are allowed to recover money paid to certain creditors a short time before a bankruptcy is filed is to keep things fair between creditors and to ensure that no one creditor has an unfair distribution of the bankruptcy assets.
As a result of this rule, parties need to be careful about settling cases with individuals and companies who may soon declare bankruptcy. In addition, settlement agreements should include language about bankruptcy if there is even a small chance that a party to the agreement will declare bankruptcy shortly after a settlement agreement is negotiated. A skilled commercial litigation attorney should understand the rules surrounding bankruptcy and how to handle litigation with parties who may soon declare bankruptcy.
Discharging Liabilities
Another important way how bankruptcy affects lawsuits is since bankruptcy can discharge legal liability. Of course, bankruptcy cases can discharge the liability of creditors listed in the bankruptcy petition, since creditors must typically go through the bankruptcy process to recover money. However, bankruptcy can also discharge the liability of parties who may be successors to companies that declare bankruptcy.
For instance, it is very common for companies or subsidiaries of companies to be bought during bankruptcy. This is because such companies usually are in a cash crunch during the bankruptcy process, and need to raise funds to satisfy creditors. Oftentimes, courts will give legal effect to purchase agreements that include language absolving the successor company of any liabilities that the predecessor might have. In many instances, such language will bar litigation concerning claims against a predecessor company that went bankrupt. This is a complex area of the law, and a skilled commercial attorney should be able to determine if a case can be made against a company or subsidiary that went bankrupt. However, it is important to mention that bankruptcy can extinguish legal liability for companies that went bankrupt and their successors.
Causes of Action
An important way how bankruptcy affects lawsuits is when a person who files for bankruptcy has a cause of action for breach of contract, personal injuries, or another legal issue. Generally, such causes of action can become part of the bankruptcy estate and may be used to pay creditors. For this reason, it is important to inform your attorney if you declare bankruptcy while litigation is pending, since this can impact the settlement of a debtor’s case. In addition, an experienced attorney may be able to negotiate with a bankruptcy trustee for a debtor to retain a larger portion of their settlement than would otherwise be possible to obtain.
Types of Cases
It is important to note that bankruptcy only affects certain types of matters. Bankruptcy does not typically affect criminal proceedings, and many family law matters are also not impacted by bankruptcy. For instance, divorce proceedings, litigation involving child support, and other family law matters will not be stayed because of the filing of bankruptcy. In addition, bankruptcy generally does not impact the responsibility of debtors to pay child support, alimony, taxes, and other types of payments. In addition, certain types of civil cases are generally not impacted by bankruptcy. For example, lawsuits that seek to recover against debtors for fraud are generally not impacted by bankruptcy. As a result, it is important to do your research when assessing how bankruptcy affects lawsuits.
The Rothman Law Firm has substantial experience handling many different types of lawsuits, and we understand how bankruptcy can affect litigation. If you are looking for an experienced New York and New Jersey attorney to handle your legal matter, please feel free to contact The Rothman Law Firm to request a free legal consultation.