Why Even Wait for a Judgment?
Bankruptcy Before Judgment Entry (Unless You Really Think You'll Win)
"When should I speak with a bankruptcy attorney? Now or later?" is the most common question any of our potential clients explore before finally picking up the phone and calling us. The problem in most cases is that they are exploring the question on their own---and they unilaterally decide that they should wait just a little longer before exploring the bankruptcy option. Even when a collections lawsuit (or two or three ...) has already been filed and noticed out to them, still the question: "Must I wait to file bankruptcy until after a judgment has been issued?" The answer? No, of course you don't have to wait. In fact, there is no real good reason to wait, unless you really believe that you have a good chance of winning the collections lawsuit and may not need to file a bankruptcy at all. If you really owe the money and incurred the debt at issue in the collections lawsuit, you should probably at least talk to a bankruptcy lawyer to explore your options. But here are couple of specific reasons why you should not wait to at least have that conversation.
Your Credit Report
A Chapter 7 or Chapter 13 bankruptcy will hover around in the "public records" section of your credit reports for 10 years from the date of filing. That's not a great thing---but, on the other hand, a bankruptcy also discharges and wipes out all of your non-dischargeable debt, flushing the debt out of your debt-to-income ratio and allowing you to re-boot and re-build your credit and credit-score after the discharge. That takes a little elbow-grease following the bankruptcy to accomplish. Do you really want the district or circuit court judgment sitting on your credit report alongside the bankruptcy as well? If you file the bankruptcy before a judgment is issued, you will have only the bankruptcy itself to remedy as a credit reporting matter going forward. If a collections judgment means that you will be looking to file a bankruptcy anyway, why not sidestep the further damage?
Don't Give the Creditor the Opportunity to Garnish You Even a Little
A bankruptcy petition is not something that typically can be filed instantly, with the push of a button. Although it is possible under the right circumstances to file what is called an "emergency bankruptcy petition" in order to stop garnishments and other collections efforts fairly quickly, emergency petitions are dangerous to file in a Chapter 7 context, as the list of your assets (which can conceivably be seized and liquidated in a Chapter 7) is not something included in an emergency filing. (Emergency petitions are safer to file in Chapter 13 bankruptcies, as Chapter 13s can be voluntarily dismissed at any time; Chapter 7s cannot.) In other words, it takes a minute to find a good Michigan bankruptcy attorney, arrange the payment of the attorney's fee, and collect the large amount of documentation they will need you to assemble in order to draft a proper bankruptcy petition, and then for your attorney to get the petition drafted and ready to file. Depending on how fast you are (or aren't) with the collection of the paperwork and the payment of the fee, that cb your paycheck, bank account, Michigan state tax refund, or engage in other collections activities. Get the process started as quickly as possible.
Preserve the Integrity of Your Bankruptcy Discharge
This one will get a bit technical---but filing the bankruptcy before judgment is issued can help you preserve the dischargeability of the debt in the bankruptcy itself. Why? There are a couple of ways a debt that is not a student loan or child support arrearage or recent tax debt or one of the "naturally" dischargeable debts from being discharged. One is fraud. A debt incurred through some variety of fraud (there are many defined in the U.S. Bankruptcy Code) is not dischargeable in bankruptcy. If a Michigan state court orders a judgment for debt liability with a count of fraud in the original complaint, that can spell trouble in a subsequent bankruptcy. We at The Hilla Law Firm, PLLC have seen at least 1 creditor's attorney in the Detroit Metro area add baseless, unsubstantiated fraud counts to collection lawsuit complaints just on the theory that they will obtain a default judgment (statistically, most defendants in collections cases do not respond or appear for hearing) that is arguably not dischargeable in a later bankruptcy. (The creditor still needs to file an "adversary proceeding" lawsuit within the bankruptcy case for an order stating that for it to be so, and there are certainly defenses to such lawsuits---but why give them an opportunity?) A related reason is the avoidance of legal defenses to dischargeability that a creditor may claim also in an adversary proceeding within the bankruptcy case to determine dischargeability. These defenses, known as a res judicata and collateral estoppel, arise when an issue (such as whether a debt was incurred by fraud) has already been "judicially decided" or the subject or prior litigation. If you actually defended the collections lawsuit rather than letting it go to default judgment, these defenses can perversely be harder to overcome. But, again, why give a creditor a leg up?
The Bottom Line Regarding Bankruptcy Before Judgment Entry: Why Bother Dealing with the Lawsuit?
The bottom-line regarding the timing of a bankruptcy relative to a potential lawsuit judgment is that, unless you're a glutton for punishment, there is little utility or benefit to bothering to continue to adjudicate the lawsuit. Why would you bother? If ending up with the judgment means you're going to consider filing a bankruptcy (and/or you don't have any actual legal defenses to the claim that you owe the creditor the money and therefore have little or no chance of winning the lawsuit), just flush the lawsuit with a bankruptcy filing. The moment you file a Chapter 7 or Chapter 13 bankruptcy, the Federal "automatic stay against collections" injunction kicks in, and all collections activity---including the prosecution of collections lawsuits---must stop. The district or circuit court will close the collections case down, and the creditor who sued you must cease all collections activity. There may be reasons why a bankruptcy is not appropriate for you, but speaking with an experienced bankruptcy lawyer sooner rather than later will at least let you know what your options are. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
If you enjoyed reading "Can I File Bankruptcy Before Judgment Entry if Being Sued?," please browse our other articles on our main Michigan Bankruptcy Blog.