A Chapter 7 bankruptcy allows you to discharge various debts after liquidating assets to repay creditors partially. However, some people who file for Chapter 7 may wonder whether bankruptcy can discharge debt related to lawsuits. Although Chapter 7 bankruptcy can resolve various types of lawsuit-related debts, individuals should consider multiple factors before deciding to pursue bankruptcy to discharge lawsuit debts. Toronjo & Prosser Law works with clients to guide them through the bankruptcy process. Contact us today for a free consultation to learn more about how we can assist you.
Common Types of Lawsuit-Related Debt
A person may become liable to pay plaintiffs who prevail in various types of civil lawsuits, such as:
- Breach of contract claims
- Defamation claims
- Personal injury claims, such as car accident or premises liability claims
- Property damage claims
- Professional negligence claims, such as medical or legal malpractice claims
- Employment law claims, such as employees’ wage-and-hour actions
- Debt collection lawsuits for credit card, student loan, or medical debts
What Happens After a Lawsuit Judgment?
When a party wins a judgment against you in a civil lawsuit, they have several options for collecting that judgment from you if you do not voluntarily pay it. The first step in enforcing a civil judgment may depend on whether a party obtained the judgment in Texas or another state. After receiving a judgment in another state, a person who wishes to enforce the judgment in Texas must first “domesticate” the judgment in a Texas court to access the legal procedures under state law for collecting the judgment in Texas.
Options for collecting a lawsuit judgment include:
- Writs of Execution – A Texas court can order a sheriff or constable to seize and sell the defendant’s non-exempt property in the county and deliver the proceeds to the plaintiff.
- Writs of Garnishment – A court may order third parties holding funds belonging to the defendant to freeze and turn over those funds to the plaintiff. A plaintiff may garnish a defendant’s bank accounts or income that the defendant receives as an independent contractor.
- Judgment Liens – A prevailing plaintiff in a civil lawsuit may place a judgment lien on the debtor’s non-exempt real estate, allowing a plaintiff to collect their judgment from the proceeds of a sale of the real estate if the debtor sells it.
Failing to pay judgment debts may have other financial consequences, such as accruing judgment interest that increases the amount a defendant owes on the judgment or having a negative report on the defendant’s credit history.
Can Bankruptcy Discharge Lawsuit Debts?
Bankruptcy can discharge some lawsuit debts. If the lawsuit involved a dischargeable debt, Chapter 7 bankruptcy can also discharge the judgment debt. For example, suppose a credit card company sues you for defaulting on your payments and obtains a judgment. Because you can discharge credit card debt in Chapter 7, a bankruptcy will allow you to discharge the credit card company’s judgment. However, bankruptcies cannot discharge certain types of debt, such as:
- Student loans
- Child or spousal support arrears
- Taxes
- Government fines
- Criminal restitution obligations
- Loans owed to pension, profit-sharing, or retirement accounts
- Personal injury or wrongful death judgments arising from drunk driving accidents
- Any debts incurred through fraud, deception, or abuse of trust (the creditor must ask the bankruptcy court not to discharge the debt)
Special Considerations for Debtors with Lawsuit-Related Debts
People who incur lawsuit debts may have various considerations regarding filing for bankruptcy, including:
- Timing of the Bankruptcy Filing – When you file for bankruptcy (i.e., pre- or post-judgment) may affect the timeline of the underlying civil lawsuit and your options for resolving a lawsuit-related debt.
- The Automatic Stay – The bankruptcy stay can potentially delay lawsuits designed to collect outstanding debts or delay a judgment creditor’s efforts to collect their judgment.
- Potential Challenges to the Discharge of Debts – A bankruptcy court can refuse to discharge certain types of debts upon a creditor’s request. When a judgment debt arises under these circumstances, filing for bankruptcy may not help you discharge that debt.
How a Bankruptcy Attorney Can Help
A bankruptcy attorney can help you manage lawsuit-related debts by:
- Reviewing the circumstances of the underlying lawsuit to determine your legal options for resolving the judgment debt, including the option for pursuing a bankruptcy discharge
- Guiding you through the bankruptcy filing process, including helping you prepare your bankruptcy filing
- Representing you in creditors’ meetings or during adversary proceedings in your bankruptcy case
- Protecting your rights under the automatic stay if parties attempt to collect judgment debts during your bankruptcy case
Frequently Asked Questions
Here are the answers to some common questions people have about resolving debts from lawsuits through bankruptcy.
Can I file for bankruptcy while the lawsuit remains ongoing?
You can file for bankruptcy during the pendency of a lawsuit that may result in a judgment liability you must pay. A bankruptcy filing triggers an automatic stay, which prohibits parties from attempting to collect debts owed by a debtor, including judgment debts. Furthermore, the automatic stay will pause certain lawsuits intended to collect debts, such as breach of loan claims or foreclosure actions.
What happens to wage garnishment for lawsuit debt after I file for bankruptcy?
The automatic stay imposed after filing for bankruptcy will also pause wage garnishment for debts from lawsuits. Instead, the party collecting the judgment through wage garnishment becomes a creditor of your bankruptcy estate, and must either pursue a claim through the bankruptcy process or ask the bankruptcy court for relief from the automatic stay to continue wage garnishment.
Do I get to keep my home or car if I file for bankruptcy?
In certain circumstances, you can keep your home or vehicle after filing for bankruptcy. In Chapter 7 bankruptcy, you may have the option of entering a reaffirmation agreement with the bank, under which you agree to continue paying your mortgage or car loan during and after bankruptcy. In Chapter 13 bankruptcy, you can use the repayment plan to catch up on missed mortgage or car payments.
Contact Us Today for Help
When you become liable to pay a judgment in a civil lawsuit but cannot afford to satisfy the judgment, you need to consult an experienced bankruptcy attorney about your debt relief options. Contact Toronjo & Prosser Law today for a confidential consultation to learn more about how bankruptcy or other forms of debt relief affect debts incurred through lawsuits.