In some cases, bankruptcy is a measured and planned response to slowly accumulating debt. Individuals who suffer a career setback or other financial hardships may eventually determine that filing for personal bankruptcy is the best solution. They may time the bankruptcy very carefully to maximize the benefits they derive while minimizing their financial exposure.
Other times, people have no option but to start considering bankruptcy because they face aggressive collection efforts. They may make the decision to file within a few days. A creditor lawsuit is one of the many scenarios that could lead to someone pursuing a personal bankruptcy filing in an expedited fashion.
Why do many people make a rapid choice to file for bankruptcy when a creditor or lender takes them to court?
Bankruptcy can prevent a lawsuit from moving forward
Creditor lawsuits can be very disempowering. Even though an individual may have a very reasonable explanation for why they have fallen behind on a payment arrangement with a creditor, a judge is unlikely to spend much time considering their explanation.
A debt-related creditor lawsuit primarily looks at whether the debt itself is legitimate and if the debtor has in fact fallen behind on their financial obligations. If the creditor can prove that the debtor has failed to meet their agreed-upon financial responsibilities, the courts may rule in their favor despite the debtor having experienced verifiable hardship.
The courts can place a lien against someone’s primary residence or grant a levy against financial accounts. They could even allow a creditor to garnish someone’s wages. A creditor could intercept a portion of someone’s paycheck, leading to a far worse financial situation.
When someone files for bankruptcy in response to a creditor lawsuit, the courts typically dismiss the pending lawsuit until they properly review and respond to the bankruptcy filing. Someone can avoid a worst-case scenario while simultaneously setting themselves up for a discharge of some of their debts.
The automatic stay granted after someone files for bankruptcy can protect the filer beginning the same day that they submit documents to the courts.
Understanding the risks inherent in a creditor lawsuit might help someone recognize why they may benefit from making a quick decision to file for bankruptcy.
