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How bankruptcy can help those who are facing creditor lawsuits

On Behalf of | Mar 4, 2024 | Chapter 7 And Chapter 13 Bankruptcy |

When someone falls behind on their financial obligations, their creditors may take legal action against them. Those who have missed credit card payments or who have medical debts they cannot pay off rapidly often worry about how creditors may attempt to collect what they owe.

What begins with phone calls and letters can eventually lead to litigation. Debt collection can go from being frustrating and inconvenient to financially devastating in a matter of weeks. Collection companies and creditors unable to force someone into making payments sometimes decide to take legal action by suing a debtor.

A lawsuit filed by a creditor could lead to wage garnishment or even a lien recorded against someone’s property. A timely personal bankruptcy filing could help protect someone from the potentially devastating consequences of a successful creditor lawsuit.

How a bankruptcy filing can help

The point of bankruptcy is to provide an individual with relief from untenable financial circumstances, including stressful collection efforts. Some of that relief comes from a discharge at the end of the process. The courts can absolve someone of their legal obligation to pay off certain qualifying debts.

As a discharge often takes months to secure in a Chapter 7 filing or years if someone files a Chapter 13 bankruptcy, creditors could take aggressive action in the interim were it not for the protection of the automatic stay. As soon as someone files for bankruptcy, the courts send out notice to reporting authorities, including the credit bureaus. Most companies engaged in financing or debt collection subscribe to services that provide them with same-day notice of bankruptcy filings. That way, the company can automatically cease making phone calls and sending letters about past-due accounts.

If a creditor has already initiated a lawsuit against someone, a timely bankruptcy filing could result in the dismissal of the pending lawsuit. The filer then has an opportunity to rework their budget and could possibly even negotiate with lenders about their arrangements for repaying their debt.

A creditor lawsuit could very easily take a difficult financial situation and make it far worse. Securing an automatic stay by filing for personal bankruptcy might put someone in a position to regain control over their chaotic financial circumstances in the wake of a creditor lawsuit.

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