Filing Bankruptcy Before a Creditor Lawsuit
With the rise in delinquencies, many creditors are turning to the courts to help them collect on debt. This means that more debtors are facing creditor lawsuits which can be both costly and time consuming. So should a debtor wait until after the lawsuit is filed and a legal battle ensues to file bankruptcy? Or, should they file bankruptcy as soon as there are signs of financial trouble. Generally speaking, it is preferable to file bankruptcy before a creditor files a lawsuit.
There are several good reasons for this as illustrated below:
Even if a debtor decides to delay bankruptcy and try to fight it out in the courts with a creditor, it’s not likely they will win. Unless the debtor can prove that the debt does not belong to them or that the creditor engaged in fraud when extending credit to them, they probably won’t get a court to rule in their favor. Instead of spending weeks or months going to court, filing bankruptcy may be a better option. The bankruptcy filing will stop the lawsuit in its tracks and give the debtor an opportunity to regroup.
Keep Unsecured Debts – Unsecured
One of the big surprises facing debtors who let lawsuits linger is that a judgment can transform unsecured debt to priority debt. In most cases, creditor lawsuits are easily won by the debt collector. The judge sees that the debtor owes the money and that there is no defendable reason why they should not have paid their bills, and then they grant a judgment. If a debtor files bankruptcy after the judgment is granted, that judgment is treated as a priority over other unsecured debts. This can be avoided if the debtor files bankruptcy BEFORE a judgment is won against them.