Ever since Remington filed for bankruptcy and the media reported that that might prevent the Sandy Hook parents from recovering anything if they prevail in their lawsuit against the gun manufacturer, we have been getting a lot of questions from potential clients about the interplay between bankruptcy and other lawsuits. In this post, we’ll dive into this issue and try to answer a few common questions about this topic.
First, let’s talk terminology. An “automatic stay” is the legal name for what happens to other lawsuits when a bankruptcy suit is filed. You can even think of it like the common command given to dogs — stay. But even good dogs will not “stay” forever. Eventually they get moving again, and so do stayed lawsuits.
Will a pending lawsuit go away if I file for bankruptcy?
The short answer is no. Filing for bankruptcy will not make other lawsuits magically disappear. All bankruptcy does is stay other lawsuits until the bankruptcy case is resolved or the court grants the litigants permission to proceed with other claims.
The longer answer is that some litigants will drop their cases or offer more favorable settlement terms if the party they are suing files for bankruptcy. Because of this, some individuals and companies will file for bankruptcy as a strategic move.
Some examples may help.
One of the most common examples of a legal action that is stayed by a bankruptcy filing is a foreclosure. Filing for bankruptcy hits the pause button on the foreclosure since the mortgage is pulled into the bankruptcy. The mortgage doesn’t disappear, but the lender might be open to renegotiating the terms.
Keep in mind that the stay stops all sorts of cases. A couple that is divorcing will have their case stayed if one of the partners files for bankruptcy.
What about criminal cases?
Unlike civil cases, criminal cases are generally not stayed when the person who is the target of a prosecution files for bankruptcy.
However, there are exceptions to this. If a criminal case involves money or property, it too might be paused until a bankruptcy case is resolved. But this is not a hard and fast rule. If the case is about money or property, but the government is seeking to punish the lawbreaker rather than seeking repayment, the case may proceed.
Consider the case of a person who starts blowing through the toll plaza without paying. The government tracks the person down and files a criminal complaint against them. Well, it turns out the person wasn’t paying the tolls because they couldn’t afford to, so he or she files for bankruptcy. Whether the criminal case is stayed depends on what the government wants out of the case. If the government wants all the back tolls paid, the case will be stayed and might even be folded into the bankruptcy case. If, however, the government wants to punish the toll-shirker by throwing them in jail, the criminal case may proceed alongside the bankruptcy case.
Bankruptcy is a tool, not a weapon.
Debtors who are considering filing bankruptcy just to pause other cases should proceed with caution. Bankruptcy is meant to be used as a tool, not a weapon. If you are struggling with debt, a debt negotiation attorney can help you organize your financials. If Bankruptcy is your only option, consult with a bankruptcy attorney to discuss whether chapter 7 or chapter 13 bankruptcy is the best option for you.