Bankruptcy, Criminal Court, & Divorce: What Happens?

The bankruptcy process can help you take control of your financial future by allowing you to seek protection under the bankruptcy code. Although the various types of bankruptcy work a bit differently, the goal is to allow both people and businesses to pay or discharge both secured debts and unsecured debts. Does the bankruptcy process stop every type of collection activity? What about lawsuits where a judgment is issued against you and you’re ordered to pay? If someone declares bankruptcy, will they still have to pay?

Bankruptcy Protects You from Collections Lawsuits

Many people see the bankruptcy process as an opportunity to escape the consequences of a lawsuit. Depending on the type of lawsuit filed, it is not a misguided belief. For example, if you fall behind on medical bills, credit card payments, your car gets repossessed, or you have utility bills that you can’t pay and the company decides to sue you, the company becomes a creditor. They are attempting to collect a debt of some kind. Bankruptcy Basics, provided by the United States Courts, classifies debt in several ways: 

  • Priority debt - Also known as a priority claim, it is debt or a claim that will be paid before any other claim according to bankruptcy code. Examples include federal tax and state tax debt owed, as well as child support and alimony.

  • Unsecured debt - Also known as an unsecured claim, it is a debt where the creditor is given no kind of promise that they will be paid. For example, most credit cards are unsecured unless they specifically state they are secured and you were required to provide some sort of deposit to ensure payment. Medical bills are unsecured debt. 

  • Secured debt - This type of debt occurs when the creditor has the right to do something with the property if you do not make your payments. For example, if you do not make your car payments, the finance company or the car dealership has the right to repossess the vehicle. Even if the property is claimed by the financier and sold, you are often still responsible for the remaining balance unless you declare bankruptcy. 

Starting the bankruptcy process, whether it’s chapter 7 bankruptcy or other types of bankruptcy, begins what is known as an automatic stay. The automatic stay stops all further collection activities, including wage garnishments, collection phone calls, and collection lawsuits for both unsecured debt and secured debt. 

However, filing for bankruptcy won’t stop every legal action that you are involved in. Below is an overview of four lawsuits that won’t go away even after your petition is filed.

Bankruptcy Code Won’t Protect You From Criminal Proceedings 

Although chapter 7 bankruptcy and other types of bankruptcy provides debtors with an automatic stay against most collection activities, the bankruptcy code does not provide protection for criminal matters. You can still be investigated for, charged with, prosecuted for, and convicted of criminal matters even if you begin the bankruptcy process. The bankruptcy court has nothing to do with separate criminal matters that you may be facing. So, it is outside of their jurisdiction. 

The idea of what is considered criminal and what is considered civil can get a little fuzzy. We can all come up with a list of things we know are crimes: DUI, assault and battery, and larceny are just a few examples. Yet, in some instances, there are occurrences that you may think are civil matters that may actually be handled by the criminal system, including traffic tickets and other fines. To better understand whether your particular situation falls under civil or criminal, it’s important to talk with an attorney. 

Additionally, if your criminal matter concludes and results in monetary punishments including fines, restitution to a victim or their family, or administrative penalties, those debts are also not able to be discharged by filing for bankruptcy. These penalties are considered part of a punishment for committing a criminal act. As such, the bankruptcy code does not cover them. 

Chapter 7 Bankruptcy and Divorce or Child Support

While chapter 7 bankruptcy isn’t the only type of bankruptcy available to individuals, it, along with chapter 13, is the most common type of bankruptcy filed after divorce. Usually, this is due to unsecured debt such as medical bills since there’s a decrease in income.

Then, there are some who are involved in divorce or child support proceedings who think that if they declare bankruptcy because they are ordered to pay, that what they owe will be discharged. This is not true. Alimony (often referred to as spousal support or spousal maintenance) and child support are considered priority debts. So, those debts are not discharged. In chapter 13 bankruptcy proceedings, those debts are paid first. 

SL Highlight - Filing Bankruptcy

Speaking of chapter 13, this specific bankruptcy process can, theoretically, affect the property division involved in your divorce settlement because your non-exempt assets are part of the bankruptcy estate. The family court cannot divide it until it receives permission from the bankruptcy court.

Before filing for bankruptcy, take the time to talk with an attorney. While you can even file for bankruptcy and divorce at the same time, that’s a significant undertaking both legally and emotionally. Depending on the type of bankruptcy filed, keep in mind that it can affect how long your divorce takes. So, if you think that you may need to file for bankruptcy to get a clean financial start (since doing so will not wipe out support obligations), talk with an attorney about doing so after the divorce is completed, so that both property and debts are divided and awarded. 

You’re Entitled to a Monetary Award From a Lawsuit

If you file a lawsuit to obtain compensation from another person or entity, filing for bankruptcy won’t necessarily stop the case from proceeding, but you may not be able to keep any money from the judgment unless you can exempt it. 

If you file for Chapter 7 and the monetary award you receive isn’t considered exempt, the Trustee may take over the case on your behalf and distribute the money to your creditors to pay priority debts, secured debts, and unsecured debts. With Chapter 13, you would be allowed to keep pursuing the suit and include any nonexempt funds in your repayment plan.

Examples of lawsuits include personal injury lawsuits, medical malpractice lawsuits, slip and fall lawsuits, breach of contract matters, etc. 

Lawsuits Involving an Interest of Justice

If you’ve filed for bankruptcy, anyone who wants to file a lawsuit against you can attempt to get permission from the bankruptcy court to do so. It’s up to the bankruptcy court to decide whether they will allow the lawsuit to move forward. While the factor involved here is whether there’s an interest of justice involved, the bankruptcy court will also determine whether the lawsuit would impact your bankruptcy case. This type of lawsuit generally involves some type of monetary award that the other party is seeking.

To request that the bankruptcy court allow a party to file a lawsuit involving an interest of justice against you, the other party files a motion to lift the automatic stay that was issued to protect you once you declared bankruptcy by starting the bankruptcy process. 

Common creditors that may ask the bankruptcy court for permission to file a lawsuit against you include:

  • A mortgage issuer may suffer financial loss if they are made to wait to foreclose on a property until the bankruptcy process ends. 

  • You decide that you don’t want to sign a new contract with the financier of your car and the financier wants the car back. The official name of signing the contract while you’re involved in bankruptcy is known as reaffirmation. 

  • Your landlord started the eviction process against you because you fell behind on your rent or violated the lease agreement in some other way, but the landlord has yet to receive an order from the judge that legally returns the property to them. 

  • A government agency wants to file a lawsuit against you without violating the automatic stay. For example, you were overpaid in unemployment wages and the state wants to be repaid. 

  • A creditor alleges that the debt you owe cannot be discharged because you acted in some way that was fraudulent and they’ve already spent a considerable amount of time and money on a lawsuit against you. 

  • The creditor convinces the bankruptcy court that they have an interest in justice. 

Learn More about Bankruptcy and Lawsuits

If you are involved in a legal proceeding or lawsuit and you’re wondering if chapter 7 bankruptcy or another type of bankruptcy might help or if you have questions about whether you’re eligible to enter the bankruptcy process, talking with an experienced bankruptcy attorney is the best way to get the answers you need. At the Law Offices of B. David Sisson, we make sure that our clients understand how or if bankruptcy can help so that they know what to expect. For more information or to schedule a consultation with Attorney David Sisson, contact us now.

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