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Lawsuits, Garnishments, and Bankruptcy

We all have heard about lawsuits and garnishments and we all have a general sense of what they are, in general. We know they’re scary and something that is to be avoided if at all possible.

There are many types of lawsuits, but the ones to focus on here are those where a creditor sues you for money on a debt, whether such debt is actually owed or is disputed in whole or in part. When a creditor sues you for money, their goal is to get an order from a court that legally determines what you owe, and this order is normally called a Judgment.

Collection lawsuits are to be taken seriously because they essentially are used by a creditor to forcefully take something of value from you, which may include part of your ongoing wages, your bank account deposits, and potentially the taking of your home, or at least the creation of a lien against your property.

When a lawsuit is filed against you, that is when you most need the help and advice of an attorney. Often, the solution is to work something out with the creditor or to get legal advice to determine whether the creditor has any ability to harm you in a practical way. However, there are times when nothing reasonable can be negotiated, and then there are times when only a bankruptcy has the real power to stop a lawsuit in its tracks.

Will Bankruptcy Stop a Lawsuit?

People frequently wonder if they have waited too long for bankruptcy to help stop a lawsuit or garnishment. While sometimes that is unfortunately true, for the vast majority of cases, a bankruptcy can help at almost any point during the process.

  • Can a bankruptcy stop a creditor from suing you? Yes!
  • Can a bankruptcy stop a lawsuit after it is filed? Yes!
  • Can a bankruptcy stop a lawsuit after a judgment is rendered? Yes!
  • Can a bankruptcy stop a garnishment after it is started? Yes!

Understanding the Basics of a Lawsuit and How They Work

All creditors have the option of suing a person for debts that remain unpaid for whatever reason. The first step is for a creditor to put together a document frequently called a petition or complaint. In this document, the creditor is called the plaintiff and the person owning the debt is called the defendant.

The petition specifies who the parties are, how the debt arose, how much is allegedly due and then asks that the court enter a judgment for the plaintiff. The defendant has a certain time period to respond to the petition after receiving a legal notice (caution: a legal notice isn’t necessarily an actual notice).

If a response isn’t filed with the court within the specified timeframe, then the plaintiff can simply ask the court that it be allowed to win by default.  If the court agrees, then a default judgment is granted.

If a response (or answer) is made, then there will be time for the parties to prepare for a trial and to gather evidence to be presented at the trial.  This process is frequently called discovery. Discovery can be done by either party and involves subpoenas of testimony (depositions) and documents, demand for whether a statement is admitted or denied (Request for Admissions), or Interrogatories (written requests of relevant questions to be answered in writing, under oath).

Once discovery is completed, the court sets a trial date and each side, the plaintiff and defendant, maneuver to try and get a quick victory if they can.  An example would be a Motion for Summary Judgment filed by either the plaintiff and/or defendant, asking the court to rule in their favor without a trial.  Ultimately, if the shortcuts don’t work, the court conducts a trial and a judgment is rendered.  Assuming an appeal isn’t filed within a certain timeframe, then the judgment becomes final, meaning it is permanent.

What Happens After a Judgment?

Once a judgment is obtained, then the creditor may use any legal means available by law to actually collect the money that a court has judicially declared due and owing.  Once such method available to a creditor, after a judgment is entered officially into the court records (called the court docket), is a garnishment. There are a few types of garnishments, but the most common ones are wage garnishments and bank account garnishments.

To garnish someone’s wages or account, the plaintiff must ask the court to issue a garnishment order. Frequently, this type of order is called an Order in Aid of Execution (the garnishment order is helping or aiding the plaintiff in collecting the judgment debt.)  A garnishment order is a type of execution order meaning that a plaintiff wants to execute (take action) on its right to garnish.  A creditor can typically garnish 25% of your after-tax wages and as low as 15% if you are determined by the court to be the head of a household.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is a very powerful and lethal weapon against lawsuits and judgments. It stops the process in its steps through what is called the automatic stay. This stay prevents any further collection effort whatsoever. From the very second that the bankruptcy is filed, the Chapter 7 Trustee is in control and the plaintiff isn’t able to do anything without prior approval of the bankruptcy court.

The debtor also has many rights and powers. For example, all lawsuits and garnishments must immediately stop. If wages are being garnished, that must stop, and sometimes a portion of the wages garnished before the bankruptcy was filed may need to be returned to the debtor or the trustee.

The Chapter 7 trustee is powerful as well and he or she may demand a return of garnished funds from the plaintiff because there are lookback rules, typically for the last 90 days before filing bankruptcy, which is known as preference rules. Additionally, if you have any defenses or counterclaims against the plaintiff, the Chapter 7 trustee inherits those rights.

Another important benefit of a Chapter 7 bankruptcy is stripping off judgment liens against your personal residence, called a lien avoidance action. There are limitations, but in Nebraska, you can normally protect up to $60,000 in equity in your residence. In Iowa, unlimited equity is protected subject to a few limitations.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy cases have the same powerful effect on lawsuits as does a Chapter 7 bankruptcy. You get the same protection, the same power, and perhaps a bit more. The Chapter 13 trustee does not normally become actively involved in lawsuits that were in progress before the case was filed. Rather, the debtor in bankruptcy takes the action.

If there are garnished funds to be returned, for example, it is the debtor (or his or her attorney), that make the demand on the plaintiff to return them to the debtor. That’s an enormously powerful tool. In short, a Chapter 13 bankruptcy provides maximum power to a debtor to stop a garnishment or lawsuit and the debtor is able to direct these powers as the debtor-in-possession.

Bankruptcy FAQs

Yes, a bankruptcy can stop most lawsuits. When you file for bankruptcy, the “automatic stay” immediately halts civil lawsuits that are intended to recover debts from you. Also, it is never too late to minimize the damage that the lawsuit may have already caused.  For example, even if the lawsuit is already at the judgment stage, filing a Chapter 7 or a Chapter 13 bankruptcy will stop the lawsuit from proceeding any further.  Lawsuits are a process and they get progressively worse.  But, even if some damage has already been done, it is important to understand that in the vast majority of cases, much of the damage can be reduced and likely undone.

Yes, bankruptcy can discharge most types of debts resulting from a judgment in a civil court. For example, if a creditor or collection agency sues you for credit card or medical debt, that debt can be cleared in a bankruptcy.

Some types of debts are entitled to special “privileges” (such as domestic support obligations, certain tax debts, and fraudulently incurred debts), which cannot be wiped out in bankruptcy. Additionally, some debts from a court judgment may become a “judgment lien” on your house; it is often possible to remove a judgment lien from your house through a bankruptcy, but you should discuss with a lawyer to determine if it is possible in your situation.

If a creditor sues and obtains a judgment against you, they become a “judgment creditor,” and they can then use various court-approved methods to collect on
the judgment. The most common method judgment creditors use is a wage garnishment. With a wage garnishment, judgment creditors can have the court
send a garnishment order to your employer to request information about your employment (such as how much money you make). In most cases, judgment creditors can use a garnishment order to garnish up to 25% of your wages, or 25% if you qualify as the head of your household.

The automatic stay is one of the key legal protections that a bankruptcy provides you and gives you immediate relief from garnishments, most lawsuits, repossessions, foreclosures, and other collection efforts. When you file for bankruptcy, the automatic stay immediately goes into effect and puts a halt to these collection efforts.

Yes, bankruptcy stops a garnishment. The power of the automatic stay—which goes into effect as soon as you file a bankruptcy—stops wage garnishments,
bank account garnishments, and other collection efforts. Even if a creditor improperly garnishes you after you have filed a bankruptcy, you are entitled to
a return of those funds.