The Party I’m Suing Filed Bankruptcy

Most of my posts are written for people who have or who are considering filing for bankruptcy protection. This is because, as an Asheville bankruptcy lawyer, a large portion of my practice involves representing individuals and businesses who file bankruptcy. In other words, I represent a lot of debtors. But, a portion of my practice involves representing individuals and small business owners who are owed money by someone who files bankruptcy. Given that I mostly represent debtors, I have a unique insight into helping honest people who are owed money navigate the bankruptcy system. This post is written for them. Specifically, I’d like to talk about the situation in which a debtor files bankruptcy after a small claims action is filed, but before the hearing.

I post answers to anonymous legal questions on Avvo.com, an excellent resource for legal advice and for help in choosing the right attorney. A recent question pricked my interest. Here’s the question:

I placed a small claims order against my neighbor and a few weeks after I filed small claims against her, she filed for bankruptcy and named me as a creditor. I have a court date set for the small claims against her coming up. What can I expect to happen from this?

Several lawyers answered this person’s question. Most gave the same answer: the neighbor’s bankruptcy filing initiated the “automatic stay” which prohibits debt collection; don’t try to hold the hearing; seek legal advice; etc. One attorney even said that the questioner should dismiss the small claims case because it’s the “right thing to do”. Maybe so. Maybe not.

As with most things, the right response depends on a number of factors. As a general matter, the filing of a bankruptcy petition brings the automatic stay into effect. This “stay” is an injunction that prohibits most types of debt collection activities. So, out of an abundance of caution, if nothing else, you should cease trying to collect the debt upon being notified that the party you are suing has filed bankruptcy. You should also immediately contact an attorney. If the hearing date occurs before you have time to consult with an attorney the best advice is simply to notify the small claims judge that a bankruptcy proceeding was filed and that you are seeking legal representation. The Judge will likely continue the hearing to give you time to sort out your options. It very well may be that you will need to dismiss you small claims case, but not necessarily.

Your claim is one that is best resolved by a court or forum other than the bankruptcy court. If so, then you may ask the bankruptcy court for “relief from the automatic stay” (or, simply “relief from stay”) to allow you an opportunity to try and resolve your dispute. If the dispute is not about a debt then the stay may not even apply to you. If it does, the Bankruptcy Court may decide that the small claims court is the best place for the hearing or trial to occur. Often, a bankruptcy court will allow a small claims court- or other tribunal- to hear a case and make a decision but will not allow the winner to act on the judgment until the bankruptcy court rules on whether executing on the judgment is appropriate. Even otherwise simple cases can become procedurally complex when a bankruptcy filing is thrown into the mix.

Additionally, the bankruptcy code provides special protection for landlords who are evicting a tenant. The rights and responsibilities are fairly technical and beyond the scope of this article, but you can contact me if you have a WNC bankruptcy attorney question that you’d like to discuss regarding landlord/ tenant issues. I’d enjoy discussing your rights with you.

Finally, in some cases the stay automatically terminates or doesn’t come into effect at all. The most recent overhaul of the bankruptcy code, which occurred in 2005, contains special provisions to address “serial filers”, a phrase used to describe people who file multiple bankruptcy cases for no reason than to hinder their creditors. Depending on the number of bankruptcy cases a person has been a part of during the year prior to filing the bankruptcy case that is affecting you, the stay may terminate on its own or even not come into effect at all.

Regardless of how or whether the stay applies to your particular case, it is possible that you have options and avenues to pursue through the bankruptcy court.

For these reasons, it is best to treat a bankruptcy notice seriously and contact a bankruptcy lawyer for advice. I’d like to help.

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