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A creditor lawsuit may be a sign to file for bankruptcy

On Behalf of | Oct 24, 2024 | Bankruptcy

Some people strategically plan their bankruptcies for weeks before they file. They have the option of timing things in a specific way because they recognize a concerning pattern in their finances. Others become so bogged down in the daily grind that they don’t see how their finances have spiraled more and more out of control until something abruptly changes.

For many, opening the front door to a process server is the wake-up call they need. When faced with lawsuit paperwork presented by a process server, they have no choice but to accept that their finances have become unreasonably problematic.

Why can a lawsuit brought over medical debt, credit card balances or other financial obligations force some people to file for bankruptcy?

Creditor judgments can be a major setback

People can lose control of their finances after debt litigation. A large percentage of creditor lawsuits are successful. Financial hardship typically does not sway the opinion of a judge in such cases. They have to look at the financial records presented by both parties and the law.

A successful creditor lawsuit might result in wage garnishment. The courts can issue a judgment that allows the creditor to intercept a portion of the debtor’s income every time they receive a paycheck. Creditor lawsuits can also sometimes lead to liens against personal property. Medical creditors, for example, can potentially place a lien against a former patient’s home. The potential of losing home equity or a portion of each paycheck can worsen an individual’s financial circumstances.

In many cases, the party facing the lawsuit can avoid the case going to trial by filing for personal bankruptcy. The same day that an individual submits bankruptcy paperwork to the courts, they receive an automatic stay. An automatic stay helps temporarily end collection activity. Creditors have to stop calling and sending letters attempting to collect on a debt. They typically also need to dismiss pending lawsuits. Frequently, the debts that lead to litigation are unsecured debts that are eligible for discharge.

Provided that a filer successfully completes the bankruptcy process, they can potentially eliminate the legal obligation to repay unsecured debt that led to the creditor lawsuit. Instead of risking a judgment that might worsen personal financial circumstances, taking immediate action is often a better solution. The decision to file for bankruptcy can be difficult to make but is often preferable to facing increasingly aggressive collection efforts and possibly a lawsuit.