If a Creditor Sues You Is It Too Late to File Bankruptcy?

Bankruptcy Basics

There are two types of personal bankruptcy -- Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, also known as liquidation bankruptcy, a debtor is required to turn over a number of assets, which will be sold; the proceeds will be used to pay off creditors. In Chapter 13, an individual submits to a financial reorganization that will leave most of his creditors paid off. Although you must meet certain requirements to file for either type of bankruptcy, you will not be denied the right due to an outstanding lawsuit.

Not only will you not be denied the right to file for bankruptcy due to an outstanding lawsuit, but outstanding lawsuits are one of the primary reasons that many people file for bankruptcy. Although devastating to a person's credit rating, bankruptcy indemnifies debtors against many actions by creditors. When you file bankruptcy, many of your debts will be discharged or reorganized, including those for which the creditor has received a legal judgment.

When a person declares bankruptcy, all lawsuit proceedings against him are immediately halted. In addition, any liens, judgments and freezes are generally discharged, at least temporarily. However, this does not mean that assets that creditors have already taken possession of as a result of a legal judgment will be returned. Any assets that a creditor has already seized will not be retroactively protected by a bankruptcy filing.

There are a number of other reasons that a judge can legally deny a borrower the right to file bankruptcy. For example, the judge may determine that you have too many assets to qualify. Also, if a judge determines that you ran up a large amount of debt with the intention of escaping payment through the declaration of bankruptcy, you may be unable to file. However, no law prevents a person from declaring bankruptcy because of an outstanding debt-related lawsuit.