What Happens to Your Case If the Defendant Files for Bankruptcy?

What Happens to a Lawsuit When the Defendant Files for Bankruptcy?

Discovering that the individual or business you are suing has declared bankruptcy can be devastating.

For many people, it feels like their case disappears into thin air.

While it doesn’t vanish completely, it does get placed on hold while the bankruptcy stays active, and knowing what to expect can allow you to better assist your personal injury attorney should you find yourself in this situation during your claim.

Automatic Stay Means Litigation Must Pause

Under federal law, as soon as a bankruptcy petition is filed, what’s known as an automatic stay springs into place under §362 of the bankruptcy code.

Essentially, the filing of a bankruptcy petition automatically stays (halts) all judicial proceedings and collection efforts against the debtor (you) at the knee, whether or not the plaintiff received formal notice of the filing.

Essentially, your lawsuit can be paused in an instant.

Insurance Can Make All the Difference

If, however, the defendant maintained liability insurance which covers your claim (and most car accident and premises liability defendants do) then your personal injury attorney in Murfreesboro can petition the bankruptcy court to modify the automatic stay to allow the case to proceed against the insurance proceeds.

Courts will look at a number of factors in determining whether to grant this type of relief from stay, such as:

• Was there insurance coverage that applied to the defendant?
• Has the insurance carrier already stepped in to defend the case?
• Would allowing the case to proceed interfere with the bankruptcy case?

Bankruptcy Will Not Discharge Insurance Debt

While bankruptcy will wipe out the defendant’s personal liability on the debt, it won’t eliminate the debt itself or prevent you from collecting on your claim.

Courts have consistently ruled that because bankruptcy is designed to provide a debtor with a “fresh start,” the discharge of their debt does not interfere with a Plaintiff’s ability to collect from the defendant’s insurance company.

For this reason, most successful motions to amend the automatic stay will include a stipulation (written agreement) by the Plaintiff that they will only recover from insurance proceeds and will not seek to collect against the defendant’s estate or personal property.

If the bankruptcy court grants your motion for relief from the stay (which is very common when there is clear insurance coverage), then your case can proceed as normal (with some delay) against the insurance carrier.

No Insurance? You May Get Nothing

If there is no insurance covering the defendant’s liability for your accident-related injury, your only option may be to file a proof of claim with the bankruptcy court and hope you’re one of the lucky creditors who receive a distribution from the bankruptcy estate.

This typically results in you receiving only a fraction of what you’re owed (if anything at all).

Tell your Personal Injury Attorney ASAP

As you can see, a bankruptcy filing by a defendant complicates things quite a bit in a personal injury lawsuit.

The good news is, however, that it doesn’t usually kill your case, particularly if there is insurance available.

Because your attorney will need to navigate the automatic stay and file various motions with the bankruptcy court, you should let them know immediately if you find out that the defendant has filed (or is thinking about filing) for bankruptcy.