You have been sued, can you fight it and still file bankruptcy? The answer is, you can, but you need to determine if you should. We decided to add this article because it comes up a lot and depending on the circumstances it can cause problems that even bankruptcy can’t solve.
Will filing for bankruptcy help me if I’ve been sued?
First, let’s start with the most common scenario – you have been sued, so should you file a bankruptcy and will that help? As is always the case with law the answer is “it depends.”
A bankruptcy filing will almost certainly stop the lawsuit and get you some breathing room. But whether you should file bankruptcy is a bigger question and involves a lot more consideration than whether or not you need to buy some time. Generally speaking though if someone has been thinking about and putting off a bankruptcy but eventually is sued for a money demand (i.e., breach of contract) the bankruptcy is probably going to be the best way to go. The alternative is likely default judgment and collections (like garnishment, judgment liens, and sometimes foreclosure – yes judgement creditors can foreclose on your house in most states).
The problems arise though when the lawsuits are more complex. We’re not talking about a simple credit card lawsuit or other money demand where you might have a good defense such as identity theft or incorrect damages calculation.
The issues come when the lawsuit is more than just simple breach of contract cases. Oftentimes, especially in business-related suits, the plaintiff will throw in the kitchen sink and accuse you of breach of contract and things like fraud, conversion, civil theft, and the like. This has the tendency to rile people up and encourage them to “clear their name” and fight the case.
This could be bad.
Losing a case while filing for bankruptcy
If you go for it and lose, you have just created a record that probably won’t be overcome if you decide to file bankruptcy resulting in the loss of your bankruptcy discharge. In circumstances like these, it is by far the better option to not save bankruptcy as a last resort (i.e. just in case you lose) and just file the bankruptcy before you get in too deep in the lawsuit. Let me repeat that, if you could potentially lose in state court on issues involving fiduciary duty, embezzlement, fraud, theft, conversion, things like that, you will almost certainly be better served by simply filing the bankruptcy if you qualify. This is especially true if you plan on defending yourself.
The legal doctrine of collateral estoppel “relieves parties of the cost and vexation of multiple lawsuits, conserves judicial resources, and by preventing inconsistent decisions, encourages reliance on adjudication.” Allen v. McCurry, 449 U.S. 90,94 (1980). What this means is that if you proceed in state court some, if not all, of those finding will be applied to your bankruptcy case. If the creditor decides to contest your bankruptcy then you won’t have the ability to refute those prior findings. They will be used against you, and you have been collaterally estopped from raising those issues again.
This is problematic because bankruptcy judges are more accustomed to weighing the equities between the parties in disputes such as these and can be more discerning than some state court judges who tend to be qualified but oftentimes overworked and underpaid. Bankruptcy courts handle disputes like this all day long and are pretty good at figuring out who is the party in the wrong. They also don’t take kindly to kitchen sink lawsuits that don’t have a lot of merit. State court judges are exceedingly competent at a wide range of issues because they have to be. But bankruptcy courts handle these types of disputes exclusively.
Some of you may be thinking at this point, what if I just defend for a little bit but before trial I file bankruptcy. Also probably not a good idea. Depending on how long you are involved, the law is clear that if you have had a chance to meaningfully participate in the court proceedings then the same issue can occur. If you spend too long in the state court and eventually file bankruptcy before the trial the damage could already be done.
In summary, you are more than welcome, and we always encourage people to get their day in court. That is the hallmark of justice that our legal system affords. However, we have seen the above occur often enough to write this article. If you have been sued, decide to defend, but would consider bankruptcy if you are unsuccessful, be careful. Once the lawsuit is filed and before you get in too deep, ensure you speak with competent bankruptcy counsel.
About the Author: Robertson Cohen
Rob Cohen is a Managing Partner of Cohen & Cohen, P.C., serving clients in Colorado and Wyoming. He’s a Chapter 7 Bankruptcy Panel Trustee, certified mediator, and has administered over 8,000 Chapter 7 bankruptcy estates.