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Why people often file for bankruptcy when a creditor sues them

On Behalf of | Jan 18, 2023 | Bankruptcy |

It is easy to lie to yourself about how bad your debt situation really is. You may promise yourself that next week you’ll rework your budget or next month you’ll apply for a second job on the weekends, but there will always be more expenses on the horizon as well.

When you have reached a point with your personal debt where you can no longer feasibly repay what you owe, you will have to make difficult choices about how to handle your finances. Eventually, despite your best efforts, you may not even be able to make minimum payments to all of your creditors. Once that happens, the likelihood of one of your credit card companies or other creditors taking you to civil court increases.

A debt-related lawsuit can lead to a garnishment of your wages or the loss of your personal property. Many people served with lawsuit documents by creditors decide to file for bankruptcy to protect themselves.

How bankruptcy helps when facing a lawsuit

If you have missed a few months of credit card payments, the company that provides your financing might decide to take you to civil court. If you were to show up in court, tales of personal financial hardship are unlikely to alter how a judge handles the matter.

Most creditor lawsuits are straightforward proceedings where the creditor demonstrates that the defendant owes money and a judge rules in the creditor’s favor. Your best chance of avoiding a judgment that could endanger your personal resources and income will often be bankruptcy.

The reason so many people file for bankruptcy within a few days of getting served is that bankruptcy can lead to the dismissal of the pending lawsuit. The same day that you file your initial bankruptcy paperwork with the courts, they send out a notice advising the credit bureaus of your automatic stay.

Until the courts resolve your bankruptcy filing one way or the other, your creditors will have to cease collection activity. They have to stop sending you letters, stop calling your home and dismiss lawsuits in most cases. Sometimes, individual creditors can ask judges to allow them to continue collection activity, but such proceedings are complicated and relatively rare.

If your bankruptcy filing is successful, your unsecured debts will largely be eligible for discharge. You may no longer have a legal requirement to repay your past due hospital bills or your credit card balances after a successful bankruptcy. Rather than risking the loss of income and further financial hardship that would come from a judgment against you, it is often much more beneficial for someone struggling financially to avoid those aggressive collection tactics, like lawsuits, when possible.

Filing for personal bankruptcy can temporarily halt worrisome creditor conduct and can also lead to a permanent solution for some of your debt.

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