When you file for Chapter 13 bankruptcy, you petition a federal court for protection from creditor lawsuits, judgments and collections. The automatic stay that results from the petition applies to anyone who has a claim against you, whether or not they have already filed a lawsuit. In effect, a bankruptcy suspends all claims until it is discharged or dismissed. In the meantime, you may be able to pursue a claim of your own, with some important conditions.
While under bankruptcy protection, you may pursue a claim arising from an event that occurred before or after you filed for bankruptcy. You must list all claims as "pending litigation" on the various forms required to open a Chapter 13 case. In addition, you must notify the trustee of any potential claims you may have -- simply delaying your suit until the bankruptcy is discharged is a breach of the law. If you have a pending claim, such as a personal injury lawsuit, that claim becomes part of the bankruptcy estate -- all assets that are not protected from creditor claims.
Awards and Exemptions
If you win a civil suit, you may be entitled to a judgment, which may be partially exempt from the bankruptcy proceeding. State laws control exemption amounts, except in states that allow you to choose between state and federal exemptions. The trustee may consider any non-exempt funds as available to your creditors through the Chapter 13 repayment plan. This could raise your monthly payments to creditors or, if the award is large enough, result in a dismissal of your case because you no longer qualify for bankruptcy.
Lawsuits Against Creditors
You can file an adversarial action against your creditors while in bankruptcy, but only with the permission of the court. Such claims might be for breach of contract or violating the terms of a loan. Such lawsuits must be undertaken within the bankruptcy case, however. Just as the automatic stay prevents creditor lawsuits against you, the same bankruptcy law bars you from filing civil actions against parties involved in the bankruptcy, unless you move for permission from the court to file the adversarial action. Even if the subject of the lawsuit lies outside the bankruptcy case, you must still secure permission to file the suit.
If you file suit while in bankruptcy and come to a settlement agreement with your defendant, you must submit the proposed settlement to the bankruptcy court. The court will not approve an insufficient settlement -- your assets, including any and all claims against other parties, are under the court's control until the bankruptcy case closes. The non-exempt settlement proceeds become part of the bankruptcy estate to be distributed to your creditors as the trustee sees fit.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.