What happens to my civil lawsuit when the defendant files for bankruptcy?
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UPDATED: Jun 29, 2022
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The defendant’s bankruptcy acts as an automatic stay of any civil lawsuit against him or her in every court or administrative agency. Ordinarily, the defendant’s attorney will file what is called a “Suggestion of Bankruptcy” that alerts the court and other parties to this fact.
As a plaintiff, your options are to (a) file a motion in the bankruptcy court requesting relief from the automatic stay in order to continue prosecuting your lawsuit in the original district court, (b) file a notice of removal to have the case transferred bankruptcy court, (c) file an adversary proceeding within the bankruptcy court, or (d) wait for the bankruptcy case to terminate and, if your claim hasn’t been discharged, continue the case in the original court. Item (d) is rarely the right course of action. Only an experienced bankruptcy attorney can advise you which would be the better course for your specific situation.
The most important thing to remember is to continue the pursuit of your claim in the proper forum—either the district court or bankruptcy court. Doing nothing actually makes your situation worse. Any claims or counterclaims that the defendant may have against you are not subject to the automatic stay. Therefore, you could end up having to pay a judgment on a counterclaim and not being able to recover at all on your original claim simply because you failed to participate in the bankruptcy or request relief from the automatic stay.