Facing Lawsuits: Using Bankruptcy for Protection

Individuals facing lawsuits can use bankruptcy for protection against creditors. When accounts go into default, creditors go after people by filing lawsuits. Or third party debt collection agencies, that assume the defaulted accounts, decide to pursue lawsuits against the individuals.

Possible Outcomes without Filing Bankruptcy

Unfortunately people facing lawsuits have limited options if they don’t file for bankruptcy. They can win by proving to the judge that they don’t owe the debt. However, the worse case for people facing lawsuits is a judge will levy a judgment against them. Judgments have potential problems such as staying on people’s credit reports for years. Another possible outcome with judgments is that they may lead to wage garnishments. With wage garnishments, employers take a percentage of money from individuals’ paychecks to pay creditors. As of 2009, the percentage withdrawn from paychecks can total up to 25 percent of people’s pay after local, state and federal taxes are deducted. For instance, someone who takes home $800 bi-weekly after taxes will instead take home $600 every other week until their $3,879 judgment is satisfied.

Bankruptcy Provides Legal Protection: Against Lawsuits with an Automatic Stay

For people who aren’t interested in working their judgment off, bankruptcy can prevent creditors in any part of the lawsuit process. An automatic stay is what the U.S. Bankruptcy Court gives anyone who files for bankruptcy. The automatic stay immediately stops creditors from filing lawsuits. It also helps with other financial problems such as foreclosures and wage garnishments. Typically, the automatic stay remains in effect to until the debts are discharged, or eliminated, or dismissed. When bankruptcy cases are dismissed for reasons such as non-payment creditors can immediately start initiating lawsuits against people.

Personal Bankruptcy: Chapter 7 and 13

Chapter 7, or liquidation bankruptcy, is for people without means to repay creditors. For instance, they may not make much money or have no job at all. Thus, with chapter 7 the bankruptcy court forgives most debts that are not secured by assets or property, according to MoneyWise. In other words, debt such as credit card account, payday loans and personal loans are eliminated.

Wage earner’s bankruptcy, commonly called chapter 13, provide individuals with an option to repay their creditors in three to five years. Usually, people pay monthly payments to the bankruptcy court and those payments are sent to creditors.

Contact an Attorney

People facing lawsuits should contact an attorney before filing bankruptcy. The attorney can advise people on which bankruptcy option is best.