Will Bankruptcy Stop a Lawsuit?

Understanding Lawsuits & Insurance Coverage

One of the reasons many of our clients seek bankruptcy advice is to obtain relief from lawsuits. In many instances, an individual or business has some insurance coverage that may help pay for fighting the lawsuit. For example, all of us in California must carry automobile liability insurance. Many professionals—such as real estate agents, doctors, lawyers, contractors, plumbers, or structural engineers—carry insurance for their profession. Many businesses carry insurance to protect them against accidental injuries that may occur at work.

Why would anyone consider bankruptcy if they carry insurance?

• Coverage Issues: The insurance may not be enough to cover the potential liability or there may be a question about what the policy covers. For example, a contractor may be sued for negligence and breach of contract, but most insurance policies only cover negligence, not the latter.
• Peace of Mind: A debtor may have insurance but prefer not to go through the lawsuit. The lawsuit may seem difficult, time-consuming, and distracting. Unfortunately, as discussed below, bankruptcy may or may not give the debtor the peace of mind she wants.
• Preventing Dangerous Judgments: Certain judgments are not dischargeable in bankruptcy. For example, if a debtor is being sued for damages arising from drunk driving, fraud, or willful misconduct, the entry of a judgment may prevent the debtor from ever discharging that debt in bankruptcy. If that is the case, the debtor may want to stop the lawsuit by seeking bankruptcy relief. However, the debtor should be aware of certain important issues, as discussed below.

How Does Bankruptcy Help with a Lawsuit?

Unless the debtor has filed one or more unsuccessful bankruptcy petitions within one year, filing bankruptcy will automatically stop the lawsuit. Furthermore, a successful bankruptcy generally means that any liability relating to negligence, breach of contract, or most other innocent errors will be discharged.

Can the Lawsuit Be Stopped Permanently?

Maybe. The party that filed the lawsuit (the "plaintiff") may abandon the lawsuit. However, the plaintiff may ask the bankruptcy court for permission to proceed with the lawsuit. For example, the plaintiff may ask for permission to proceed to collect only against insurance policies. Whether the bankruptcy court will grant the plaintiff's request depends upon multiple factors, including whether the debtor seeks Chapter 7, 11, or 13 relief, the nature of the lawsuit, whether insurance coverage exists, and several other factors. 

Dealing with Lawsuits in Small Claims Court & Superior Court

If you have been served with a summons and complaint, you are probably a defendant in a civil lawsuit. If you are being sued in Small Claims Court, you must appear at the designated time and place to present your defense. If you are being sued in Superior Court, you generally have 30 days to file an answer with the court. If the lawsuit seeks to evict you, you generally have only five days to file your answer. The 30-day and 5-day period start from the day you were served with the summons and complaint. It includes weekends. 

Whether you are being sued in Small Claims Court or Superior Court, you should immediately seek the assistance of an attorney to protect your rights. If you do not take the necessary steps to protect your legal rights, a judgment can be entered against you. Once a judgment is entered against you, your wages can be garnished, and your bank account can be levied without any notice or warning.

Sometimes, the summons and complaint include a date and time for a "Case Management Conference." Do not think you can go to the Case Management Conference, ask the judge to explain your rights, listen to your case, help you fill out paperwork, refer you to an affordable lawyer, or give you more time! 

If you have not filed your answer within the allowed period (generally either 5 or 30 days), then your default will probably be entered. Once your default is entered, the Case Management Conference will probably be canceled. Even if it is not canceled, the judge will probably not let you speak if your default has been entered.

Filing bankruptcy will immediately stop the lawsuit. You will not have to file an answer in Superior Court or appear in Small Claims Court. Stop worrying. Call today for a free initial consultation with our San Jose bankruptcy law firm.