How an automatic stay can affect creditor lawsuits

On Behalf of | Jun 10, 2024 | Bankruptcy |

The legal system helps to protect people and businesses from a variety of different challenges. For example, the law protects the rights of those who loan money to others to collect on a valid debt. However, the law also limits certain types of collection activity to protect individuals from abusive financial practices.

Creditors can call people and send them letters, but they cannot harass or directly threaten individuals. If someone who owes money falls behind on their payment obligations or refuses to communicate with a creditor, the party trying to collect on the debt may take drastic action. A creditor lawsuit is a way for a business to force someone to fulfill their financial obligations.

The courts could place a lien against someone’s personal property or even allow a creditor to garnish their wages. A bankruptcy filing could protect someone from the worst-case outcome of a creditor lawsuit.

Legal service often leads to a bankruptcy filing

Leaving work or opening the front door to encounter a process server is a stressful experience. Legal service was lawsuit paperwork can disrupt someone’s day and destabilize their finances.

The unfortunate reality is that creditors often prevail when they sue individual debtors unless there are issues with the paperwork. Typically, the courts do not care why someone fell behind on payments so much as they care about the legitimacy of the debt and that the defendant has not complied with payment arrangements.

One of the only ways to resolve a creditor lawsuit favorably is to file for personal bankruptcy. Creditors usually have to dismiss a lawsuit after someone files for bankruptcy.

The automatic stay prevents all collection efforts

When someone files for bankruptcy, they receive an automatic stay from the courts. That stay is essentially an order protecting them from any future collection activity until the courts resolve the bankruptcy.

A lawsuit is one of the most aggressive forms of debt collection possible, and the courts typically do not allow pending lawsuits to proceed while there is a bankruptcy case underway. Creditors can file paperwork to dismiss lawsuits after learning about the bankruptcy filing.

For many people, the automatic stay is what makes them decide to file for bankruptcy. A pending creditor lawsuit could do significant damage to someone who already struggles financially. Filing for personal bankruptcy can be a viable solution for those concerned about a creditor lawsuit.


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