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New Year Resolution #10: Resolve an Impossible Business or Personal Lawsuit through Bankruptcy

If you or your business is stuck in litigation that is sucking you dry financially and emotionally, bankruptcy may be your best way out.


Getting Stuck in Litigation

You may not have been a candidate for filing bankruptcy when, many months or even a year or two ago you or your business got sued. Or maybe you did the suing yourself to try to correct a wrong that was done to you, and bankruptcy might have been the furthest thing from your mind at the time.

But whether you are the plaintiff or the defendant in this lawsuit, things aren’t going well. What you hoped would get resolved quickly in your favor has gotten bogged down, with your aggressive adversary forcing you to spend much more in attorney fees than you thought possible. You may well lose the lawsuit. Or if you win, it will be an empty victory because of what it cost you to get it, and/or because you will have little or nothing to show for all your money and effort.

If the lawsuit is heading in the wrong direction, your costs keep going up steeply, and your risk of losing is increasing, you need a way to get out of the lawsuit and be insulated from the liability that you now fear will come from it.

Here some reasons why filing bankruptcy might possibly be the best way to get out of this bad situation.

Bankruptcy Stops Litigation

The filing of a bankruptcy case immediately stops virtually all civil (non-criminal) lawsuits. This is especially helpful if you are about to be forced to incur a lot of attorney fees, such as if a series of depositions or if the trial were about to begin. This immediate stop to the litigation would also be important if your opponent was about to take a step potentially dangerous to you, such as to get a judgment against you, or to enforce a judgment against you or your assets.

A Helpful Pause

Besides stopping the litigation activity itself, that pause gives your opponent the opportunity to reconsider whether its own expenses, time and hassle are worthwhile. Getting out of the heat of the battle can make the other side take stock in whether its own very real costs are worth the questionable practical benefits arising from them.

These costs will often weigh more heavily on your opponent because your act of filing bankruptcy can take away many of the practical benefits your opponent was expecting out of the litigation.

The Threat of Discharge of the Debt

Most directly, once you file bankruptcy the pot of gold your opponent hoped to mine out of you will either completely evaporate or mostly so. Any debt you owe out of the litigation will either be completely discharged (legally written off), partially discharged, or will take the opponent a whole new battle to prevent from being discharged.

Most debts and other financial obligations are discharged in a Chapter 7 “straight bankruptcy.” If you chose to file a Chapter 13 “adjustment of debts” instead, the debt or obligation would likely be paid only a certain percentage of the full amount, often a small percentage, with the remaining portion completely discharged.

As to the possibility that a debt or obligation would not get discharged at all, only a few narrow categories are not discharged. Your opponent would have to affirmatively show the obligation fits within one of those narrow categories, which would generally only apply if you tainted the obligation through some kind of fraudulent conduct in the incurring of the obligation. And even then, if your opponent did not formally object to the discharge of the obligation within a very short timeframe, the debt would be discharged regardless how it was incurred.

Tangible Evidence of Your Inability to Pay

You must sign under penalty of perjury the bankruptcy documents that you and your attorney prepare and file at court. These documents will reveal to your litigation opponent that you have very little in assets, all or essentially all of which are protected from your opponent. The documents will also often reveal that you have many other debts, perhaps including “priority” ones like recent income taxes and back child support that would have to be paid in full before any money would be available to your opponent.

As your opponent learns these realities, he will likely become less interested in wasting more attorney fees on chasing you.

Resolution of the Litigation

As a result of filing bankruptcy, your opponent’s claim against you will either be discharged altogether through Chapter 7, will be partially paid through Chapter 13, or else will likely be favorably settled by your opponent to avoid getting discharged. The pause created by the bankruptcy filing, together with the better negotiating posture your bankruptcy filing puts you into, will likely encourage your opponent to either give up or settle the matter quickly.

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