Bankruptcy and Your Debt Collection Lawsuit

Bankruptcy.  No one wants to file it.  And because of that some people will delay the filing of their bankruptcy even though it could have disasterous consequences.  There are, however, a few what I like to call “motivators” when it comes to filing a bankruptcy case.

You can become very motivated to file your bankruptcy if you receive a wage garnishment, served with a lawsuit, or a bank levy.  Once your creditors start taking things from you it is definitely time to start paying attention.

In particular, if you get served with a debt collection lawsuit you have a limited amount of time to act.  “Service” of the lawsuit usually means that a process server has come to your house and handed you a copy of the summons and complaint.  However, sometimes creditors can get permission to simply mail it to you or post it on your door.  No matter how you received the lawsuit documents, now that you have them you need to take action.

Sometimes it makes sense to fight the lawsuit.  Other times it may be a better option to eliminate the debt collection lawsuit altogether through bankruptcy.  The first benefit to filing bankruptcy is the bankruptcy court will issue an order that stops all collection efforts against you.  This means that the debt collection lawsuit cannot go forward.  This is important because when it comes to a lawsuit if you don’t submit a written response the court will enter a default judgment against you.  And once a default judgment has been entered the creditor can then try and garnish your wages and all kinds of horrible things.

Next, the bankruptcy will eliminate the underlying debt that you are being sued on.  Better yet, even if a default judgment has been entered in most cases the bankruptcy will void the judgment and eliminate the debt!

So how do you know if you should fight the lawsuit or file bankruptcy?  What I tell my clients is to look at your total financial picture.  If you fight this lawsuit and win, will it be followed by several others?  If so, then bankruptcy is likely the better option.  If you wouldn’t even consider bankruptcy except for this current lawsuit then maybe fighting is better.  In making this decision you should meet with an attorney to discuss your options.