Learn Your Options and Get Debt Relief Now
If you fall behind on your bills, creditors may start calling or sending harassing letters, demanding payment. If this goes on too long, they may file a lawsuit against you to get that money.
Of course, if you’re able to pay off your debt, then you can just do so. But if you’re not, and your debt grows so high you can’t imagine a way out, you may feel out of options and in desperate need of debt settlement as soon as possible.
One option is filing for bankruptcy, which can discharge most of your debt and give you much-needed debt relief.
But what if a creditor sues you to collect the money before you’ve filed for bankruptcy—is it too late, or can filing for bankruptcy help you stop that?
The answer in most cases is yes.
First, let’s review the two most common types of personal bankruptcy, Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy erases the majority of your unsecured debts, meaning you no longer have to pay those. These debts can include credit card debt, medical bill debt, and other kinds of debt.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy creates a three- to five-year repayment plan that covers a portion of your unsecured debts, while the rest is wiped out. This gives you more time to pay off some of your debts, in addition to eliminating much of it.
So now let’s look at how being sued affects filing for bankruptcy.
Effect of Filing Bankruptcy: The Automatic Stay
Most lawsuits filed to collect on debts owed are dischargeable in bankruptcy. This means that filing for bankruptcy, either before the court date or after a judgment has entered, will wipe out the debt for which you are being sued and the judgment itself if it has entered.
Once you file for bankruptcy, you are immediately protected by what’s known as the “automatic stay.” The automatic stay prevents creditors from continuing to try to collect on your debts, and this includes lawsuits. The automatic stay immediately stops lawsuits pending against you and protects you for the length of your bankruptcy. Additionally, creditors are barred from continuing to call you or send letters demanding payment. Financial difficulties are stressful enough, so removing this constant harassment can be a great stress reliever.
If you receive a Chapter 7 bankruptcy discharge, the debt you were being sued for is wiped out and cannot be collected in the future. This is true even if judgment is entered before you file bankruptcy.
In a Chapter 13 bankruptcy, most people end up paying a small fraction of their debts over a three- to five-year repayment period while they’re protected from collection by an automatic stay. Then, they receive a discharge on those debts at the end of their Chapter 13 payment plan.
Bankruptcy can be confusing and overwhelming. Each type of bankruptcy, Chapter 7 or Chapter 13, has its own specific rules and features, its pros and cons. That’s why it’s important you speak with a debt settlement law firm, such as the bankruptcy attorneys at Wink & Wink in Denver, Colorado. They can review your case and see if filing for bankruptcy is the right move and how best to do it.
Bankruptcy Cannot Help In Cases of Child Support, Fraud, and Criminal Proceedings
There are exceptions, however, to how bankruptcy can help you in a lawsuit. If the lawsuit is to collect a debt that is NOT dischargeable in bankruptcy (such as a suit for child support, student loans, or in some cases for claims involving fraud), it may be stalled temporarily by the automatic stay when you file bankruptcy. However, the lawsuit may continue and the creditor may collect on a judgment after bankruptcy if the debt is not discharged in bankruptcy. Additionally, if the case is a criminal court proceeding, then the lawsuit will be allowed to continue and the automatic stay will likely not apply.
What Should You Do About the Summons?
If you are served with a summons to appear in court and you are considering filing bankruptcy, you have two options: 1) answer the complaint or 2) do nothing.
1. Answer the Complaint
When you are served with a summons, it will contain a time period in which you must file an answer with the court. If you do not file the answer in that time frame, you lose the right to do so, and a default judgment will enter against you.
You can file an answer in which you assert any defenses you may have to the lawsuit as well as any counterclaims you have against the party suing you. Defenses may include the statute of limitations has expired, lack of evidence, or no proof that the creditor actually owns the debt. Failing to file an answer means you waive the right to assert any defenses or counterclaims, and it can be taken by the court as an admission that you owe the debt.
Filing an answer in the lawsuit also gives you more time until a judgment will enter because the court will have to set a new court date for a pretrial conference and allow the parties more time to prepare their cases and request discovery. Therefore, filing an answer can be a good idea if you want more time to look into options, such as bankruptcy or debt settlement.
Filing an answer does cost money, however. Speak with a debt relief attorney at Wink & Wink to understand what fees you may pay for filing an answer in county court.
2. Do Nothing
Your other option if you’ve received a summons is to do nothing, knowing that a default judgment will enter against you in the case. Once a default judgment enters, it will show up on your credit report, and the creditor will be able to use legal means to collect on the judgment. Remember though that bankruptcy can stop the collection of a judgment (as long as it is for a dischargeable debt, as discussed above). Bankruptcy also wipes out the judgment once a discharge enters.
If you choose to do nothing, and you do not plan to file for bankruptcy, there is a possibility that your creditor will seek to have you brought into court to answer questions about your assets, bank locations, and employer information through a demand to answer interrogatories. If you fail to answer interrogatories, you can be found in contempt of court and even have a warrant issued for your arrest.
What If a Judgment Has Already Entered?
Once a judgment enters against you, the creditor can seek to collect the judgment from either you or your property. The most common ways they do this are: 1) garnishment, 2) levy or attachment of bank accounts, and 3) judgment lien filed on your property.
In Colorado, creditors can collect on a judgment by garnishing up to 20% of your wages. Once a judgment enters, the creditor will serve notice upon your employer, who will then give you notice of the upcoming garnishment. The garnishment will continue until the entire judgment is paid in full, including attorney’s fees and other fees for the collection efforts.
If you’re already in need of debt relief, taking home even less money each paycheck can be even more painful emotionally and financially. Thankfully, a bankruptcy filing can immediately stop a garnishment.
2. Levy or Attachment of Bank Accounts
Your judgment creditor can also collect against money you have in the bank. They do this by serving a notice to your bank. Your bank then seizes the funds (and often charges you a fee to do this) and gives you notice and a chance to claim the money exempt under Colorado or Federal law. Some possible exemptions would be social security funds or disability funds. Additionally, since Colorado passed into law a significant expansion to the property protected from garnishment in 2022, Amended Colorado Revised Statute 13-54-102(w) now enables Coloradans to exempt up to $2,500 of funds in the bank.
In some cases, bankruptcy can help you get those funds back if they would be exempt in your bankruptcy case. Speak with a bankruptcy attorney at Denver-based Wink & Wink to learn more about what assets and funds may be exempt when you file for bankruptcy.
3. Judgment Lien Filed on Your Property
In Colorado, your judgment creditor can file a transcript of the judgment in any county in which you own property. That judgment will then act as a lien upon the property. This means that if you try to sell the property in the future, that judgment must be paid before the title can be transferred to a new owner.
In bankruptcy, judgment liens that attach to property you claim as exempt may be avoided or removed. However, this depends on the property, its value, and your personal bankruptcy exemptions. Not all judgment liens can be removed through bankruptcy.
Speak With a Denver Bankruptcy Law Firm Today
Being sued is stressful and can result in your property being seized out from under you, but in most cases bankruptcy can help. This is because bankruptcy can wipe out your liability for the debt and stop any further collection against you, regardless of whether you have been sued already or whether there is a judgment against you, or even whether your wages are already being garnished.
If you are planning to file for bankruptcy, a lawsuit should not cause any problems, though it may speed up the time frame in which you want to file in order to avoid a garnishment or liens on your property.
In most cases, having a lawsuit filed against you by a creditor means it is a good time to have a free consultation with a bankruptcy attorney to explore all your options—and the sooner the better. Most people wait too long to find out about bankruptcy protection, and it costs them. If you are served with a summons, it’s not too late.